Is laminate flooring an “Improvement” or “Depreciable Property”?
"Aesthetics aside, laminate floor is attached to the floor and as such is a part of the building. So you depreciate it with the building itself, similarly to the roof. I believe the IRS considers these permanently attached because the foam itself is permanently attached, and is a part of the installation. To the best of my knowledge, the only flooring that is considered as a separate unit of property is tucked-in carpet or carpet pads (typically installed in commercial buildings, not homes). Everything else you'll have to prove to be an independent separate unit of property. Technically, you can take the tucked in carpet, and move it elsewhere as-is and be able to install it there assuming the size fits. You cannot do it with the foam (at the very least you'll need a new foam cover in the new location since you cannot take the foam with you from the old one). That's the difference between a ""separate unit of property"" and ""part of the building"". Note that the regulations in this area have changed significantly starting of 2014, so you may want to talk to a professional."
Don't buy a house as an investment; buy it if/because it's the housing you want to live in. Don't improve a house as an investment; improve it if/because that makes it more comfortable for you to live in it. It's a minor miracle when a home improvement pays back anything close to what it cost you, unless there are specific things that really need to be done (or undone), or its design has serious cosmetic or functional issues that might drive away potential buyers. A bit of websearching will find you much more realistic estimates of typical/average payback on home improvements. Remember that contractors are tempted to overestimate this. (The contractor I've used, who seems to be fairly trustworthy, doesn't report much more than 60% for any of the common renovations. And yes, that's really 60%, not 160%.) "You can exclude up to $250000 ($500000 for married filing jointly) of capital gains on property which was your primary residence for at least 2 years within the 5 years preceding the sale. This is called ""Section 121 exclusion"". See the IRS publication 523 for more details. Gains is the difference between your cost basis (money you paid for the property) and the proceeds (money you got when you sold it). Note that the amounts you deducted for depreciation (or were allowed to deduct during the period the condo was a rental, even if you chose not to) will be taxed at a special rate of 25% - this is called ""depreciation recapture"", and is discussed in the IRS publication 544." Yes. As a general case, insurance proceeds are repaying you for the damage that you have already incurred, not specifically for fixing anything.  Since you have the legal right to sell the house as-is, without fixing it up at all, then you have the legal right to spend the insurance proceeds how you see fit. You can upgrade, downgrade, alter or replace your deck in any reasonable way... or do nothing.    You should call your agent and make sure that there is nothing unusual in your policy, but this kind of homeowner decision - what materials or methods to fix damage to a home... is very normal and unremarkable, so your agent will probably reassure you and end the conversation without a second's thought. There are at least three important aspectss missing from your equation. However they come with some uncertainty as one typically cannot tell the future performance. Appreciation of the rental units value. When comparing to the gain of any alternative investment an increasing value of the flat is a gain too. Increase of rent. Rents are typically adjusted either on a regular basis or at least when changing tennants. Calulation with a flat rent over 20 years is therefore way off. Tax deductions due to capital expenditures (i.e. mortgages), expenses for the upkeep and maintenance of the property, conserving and management, and so on. Obviously those are depending on your local legislation. There are multiple other issues to consider of course, e.g. inadvertant vacancy, which would not act in your favour. "Consider that there are some low-probability, high-impact risk factors involved with property management. For example, an old house has lead paint and may have illegal modifications, unknown to you, that pose some hazard. All of your ""pros"" are logical, and the cons are relatively minor. Just consult an attorney to look for potential landmines." You may be able to choose.  As a small business, you can expense certain depreciable assets (section 179).  But by choosing to depreciate the asset, you are also increasing the cost-basis of the property.  Are you planning to sell the property in the next couple of years?  Do you need a higher basis? Section 179 - Election to expense certain depreciable business assets Your capital gain is about $40K, which (assuming your total income is under $250K) is taxed at 15% long term capital gains rate. Additional depreciation recapture of approximately $5K is taxed at 25%. So this gives us rough estimate of $7250 tax. This is Federal tax, AZ rates are somewhere between 2% and 4%, so you'll be looking at some $1.6K additional tax to AZ. If you have accumulated rental losses or other expenses, it will lower the total amount of your gain (and, accordingly, the taxes). This is all very rough estimates, and you shouldn't rely on this but verify on your own or with a professional. I suggest using professional services because while being costly, they will probably save you more in taxes than you'll have to pay them because of the knowledge of what exactly of your expenses can be deducted and how to calculate the cost basis correctly. (edit from JoeT - the home exclusion requires occupancy for 2 of prior 5 years. For the OP, the prorated $125k exclusion 'might' cover the gain, it depends when the increase in value occurred, if the gain was during the time rented, it's taxable, I believe.) The first method is the correct one. You bought an asset worth of $1000 and you put it on your depreciation schedule. What it means is that you get to write off the $1000 over a certain period of time (and not at once, as you do with expenses). But the value you're writing off is the $1000 regardless of how much you've written off already. Assume you depreciate in straight line over 5 years (that's how you depreciate computers for Federal tax purposes, most states follow). For the simplicity of the calculation, assume you depreciate each year as a whole year (no mid-year/mid-quarter conventions). The calculation is like this: If you sell the computer - the proceeds above the adjusted basis amount are taxed as depreciation recapture up to the accumulated depreciation amount, and as capital gains above that. So in your case - book value is the adjusted basis at the end of the year (EOY), depreciation this year is the amount you depreciate in the year in question out of the total of the original cost, and the accumulated depreciation is the total depreciation including the current year. In Maryland they do not allow depreciating to $0, but rather down to 25% of the original cost, so if you bought a $1000 computer - you depreciate until your adjusted basis is $250. Depreciation rates are described here (page 5). For computers (except for large mainframes) you get 30% depreciation, with the last year probably a bit less due to the $250 adjusted basis limitation. Think carefully about the added expenses.  It may still make sense, but it probably won't be as cheap as you are thinking.  In addition to the mortgage and property taxes, there is also insurance and building maintenance and repairs. Appliances, carpets, and roofs need to be replaced periodically.  Depending on the area of the country there is lawn maintenance and now removal. You need to make sure you can cover the expenses if you are without a tenant for 6 months or longer.  When tenants change, there is usually some cleaning and painting that needs to be done. You can deduct the mortgage interest and property taxes on your part of the building.  You need to claim any rent as income, but can deduct the other part of the mortgage interest and taxes as an expense.  You can also deduct building maintenance and repairs on the rental portion of the building.  Some improvements need to be depreciated over time (5-27 years).  You also need to depreciate the cost of the rental portion of the building.  This basically means that you get a deduction each year, but lower the cost basis of the building so you owe more capital gains taxes when you sell. If you do this, I would get a professional to do your taxes at least the first year.  Its not hard once you see it done, but there are a lot of details and complications that you want to get right. Yes, but how does that compare to those with multiple houses?  I build homes in the Seattle area for a living and one lifestyle who own several rentals... One thing them do is use equity for their 4 homes to purchase another.. Writing off the the interest paid on the loan(s)...  I'm not saying it's a deduction normal people don't use... I'm just saying that it strikes me as a deduction that the wealthiest  landlords use more with better results... "Straight Line Depreciation is the easiest method of depreciation, don't over think it.  Straight Line = (Assets Cost - Assets Salvage Value)/Useful life  In this case the Straight Line is $2m per year, it is not culmulative unless you are looking at accumulated depreciation account on the balance sheet.  Here is a schedule of the depreciation:  * Year 1 - $2m * Year 2 - $2m * Year 3 - $2m * Year 4 - $2m * Year 5 - $2m  See, can't get much easier than that!  Once you get into more complicated questions they'll throw tax rates at you and ask about cash flows, or the NPV of the cash flows.  You need to take into account the fact that the Depreciation is not a ""cash expense"" but it does affect cash flow by reducing the taxable income of the project.  Also, you need to consider the fact that the asset will be sold in year 5 and the value will need to be part of your cash flow and NPV calculations.  I hope this was helpful, if not I'll try to do my best answering any other questions.  Good Luck!" Should I treat this house as a second home or a rental property on my 2015 taxes? If it was not rented out or available for rent then you could treat it as your second home. But if it was available for rent (i.e.: you started advertising, you hired a property manager, or made any other step towards renting it out), but you just didn't happen to find a tenant yet - then you cannot. So it depends on the facts and circumstances. I've read that if I treat this house as a rental property, then the renovation cost is a capital expenditure that I can claim on my taxes by depreciating it over 28 years. That is correct. 27.5 years, to be exact. I've also read that if I treat this house as a personal second home, then I cannot do that because the renovation costs are considered non-deductible personal expenses. That is not correct. In fact, in both cases the treatment is the same. Renovation costs are added to your basis. In case of rental, you get to depreciate the house. Since renovations are considered part of the house, you get to depreciate them too. In case of a personal use property, you cannot depreciate. But the renovation costs still get added to the basis. These are not expenses. But does mortgage interest get deducted against my total income or only my rental income? If it is a personal use second home - you get to deduct the mortgage interest up to a limit on your Schedule A. Depending on your other deductions, you may or may not have a tax benefit. If it is a rental - the interest is deducted from the rental income only on your Schedule E. However, there's no limit (although some may be deferred if the deduction is more than the income) if you're renting at fair market value. Any guidance would be much appreciated! Here's the guidance: if it is a rental - treat it as a rental. Otherwise - don't. In general, you most definitely can. In some cases you must. However for each State you'll have to check whether you can choose how to depreciate. Many States require you to take the same depreciation as on the Federal schedule, including Sec. 179, others won't allow Sec. 179 at all. Specifically to PA, I haven't found any current guidance, but the rules from 2012 put PA in the bucket that requires you to take the same Sec. 179 on the State return as appears on your Federal return. If you elect to expense Section 179 Property for FIT purposes, you are   required to expense the property for PIT purposes. However PA limit for Sec. 179 is $25K, so if your Federal deduction is larger - you can depreciate the rest. Check with a PA-licensed CPA or EA for a more reliable opinion, since I'm not a tax adviser. Just googled it. First, the basis is what was paid for the house along with any documented upgrades, any improvements not consider maintenance. Any gain from that point is taxable. This is the issue with gifting a house before one passes. It's an awful mistake. The fact that there was a mortgage doesn't come into play here nor does the $15K given away. Your question is great, and the only missing piece is what the house cost. Keep in mind, depending on the state, you MIL may have gotten a step-up on the passing of her husband.  On a very personal note - my grandparents bough a family house. 4 apartments. 1938 at a cost of $4000. My grandmother transferred 1/2 share to my father well before she died. And before my father's death it was put into my mother's name. Now that she's in her last years, I explained that since moved it to my sister's name already, there's no step up in basis. This share is now worth over $600,000, and after 4 deaths, no step up. When my sister sells, she will have a gain on nearly 100% of the sale price. In my opinion, there's a special place in hell for lawyers that quit claim property like this. For a bit of paperwork, the house could have been put into a trust to avoid probate, avoid being an asset for medicaid, and still get the step up. Even a $2000 cost for a good lawyer to set up a trust would yield a return of nearly $100,000 in taxes avoided. (And as my sister's keeper, I'd have paid the $2,000 myself, no issue that she gets the house. She needs it, I don't. And when the money's gone, I'm all she has anyway.) This will be a complex issue and you will need to sit down with a professional to work through the issues: When the house was put up for rent the initial year tax forms should have required that the value of the house/property be calculated. This number was then used for depreciation of the house. This was made more complex based on any capital improvements. If the house wasn't the first he owned, then capital gains might have been rolled over from previous houses which adds a layer of complexity.  Any capital improvements while the house was a rental will also have to be resolved because those were also depreciated since they were placed in service. The deprecation will be recaptured and will be a part of the calculation. You have nowhere near enough info to make a calculation at this time.