Tax advice - depreciation
Jan 25th 2014, 5:42 pm
#1
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Joined: Jun 2012
Posts: 3
Tax advice - depreciation
Hi guys!
This may be too detailed of a question.
I'm filing US tax returns. I'm reporting my UK rental income.
I've been told that you can only claim depreciation on freehold property and not leasehold. This seems strange given that (a) in the UK most properties in London are sold on long leaseholds (b) I thought that you could only depreciate property value, not land, and by definition if you own a leasehold property you own the property and not the land.
Anyone in a similar situation?
Many thanks in advance!
This may be too detailed of a question.
I'm filing US tax returns. I'm reporting my UK rental income.
I've been told that you can only claim depreciation on freehold property and not leasehold. This seems strange given that (a) in the UK most properties in London are sold on long leaseholds (b) I thought that you could only depreciate property value, not land, and by definition if you own a leasehold property you own the property and not the land.
Anyone in a similar situation?
Many thanks in advance!
Jan 26th 2014, 1:58 am
#2
BE Forum Addict
Joined: Aug 2004
Posts: 4,754
Re: Tax advice - depreciation
Hi guys!
This may be too detailed of a question.
I'm filing US tax returns. I'm reporting my UK rental income.
I've been told that you can only claim depreciation on freehold property and not leasehold. This seems strange given that (a) in the UK most properties in London are sold on long leaseholds (b) I thought that you could only depreciate property value, not land, and by definition if you own a leasehold property you own the property and not the land.
Anyone in a similar situation?
Many thanks in advance!
This may be too detailed of a question.
I'm filing US tax returns. I'm reporting my UK rental income.
I've been told that you can only claim depreciation on freehold property and not leasehold. This seems strange given that (a) in the UK most properties in London are sold on long leaseholds (b) I thought that you could only depreciate property value, not land, and by definition if you own a leasehold property you own the property and not the land.
Anyone in a similar situation?
Many thanks in advance!
From http://www.irs.gov/publications/p946...link1000107299
Leased property. You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). This means you bear the burden of exhaustion of the capital investment in the property. Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. You can, however, depreciate any capital improvements you make to the property. See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4.
If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property.
Incidents of ownership. Incidents of ownership in property include the following.
The legal title to the property.
The legal obligation to pay for the property.
The responsibility to pay maintenance and operating expenses.
The duty to pay any taxes on the property.
The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion.
Life tenant. Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. However, see Certain term interests in property under Excepted Property, later.
If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property.
Incidents of ownership. Incidents of ownership in property include the following.
The legal title to the property.
The legal obligation to pay for the property.
The responsibility to pay maintenance and operating expenses.
The duty to pay any taxes on the property.
The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion.
Life tenant. Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. However, see Certain term interests in property under Excepted Property, later.
Last edited by nun; Jan 26th 2014 at 2:05 am.
Jan 26th 2014, 2:18 am
#3
Joined: Dec 2001
Location: Dixie, ex UK
Posts: 52,586
Re: Tax advice - depreciation
I suspect that the thorny issue at the heart of the problem is the distinction between a rented property and a leasehold property. You certainly CANNOT depreciate a building if you are only renting it, but "leasehold" is not common in the US (and may not exist at all?), so the advice given may be from someone confusing "leasehold" with a house that you are leasing.
I think you need professional advice before submitting a tax return, but given that with a British leasehold, you DO own the building, I believe that a leasehold building in the UK should be depreciable over the same period as an equivalent freehold property.
Jan 26th 2014, 5:26 am
#4
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Joined: Nov 2012
Posts: 904
Re: Tax advice - depreciation
26½ years, if in the US, or 40 years if overseas.
I suspect that the thorny issue at the heart of the problem is the distinction between a rented property and a leasehold property. You certainly CANNOT depreciate a building if you are only renting it, but "leasehold" is not common in the US (and may not exist at all?), so the advice given may be from someone confusing "leasehold" with a house that you are leasing.
I think you need professional advice before submitting a tax return, but given that with a British leasehold, you DO own the building, I believe that a leasehold building in the UK should be depreciable over the same period as an equivalent freehold property.
I suspect that the thorny issue at the heart of the problem is the distinction between a rented property and a leasehold property. You certainly CANNOT depreciate a building if you are only renting it, but "leasehold" is not common in the US (and may not exist at all?), so the advice given may be from someone confusing "leasehold" with a house that you are leasing.
I think you need professional advice before submitting a tax return, but given that with a British leasehold, you DO own the building, I believe that a leasehold building in the UK should be depreciable over the same period as an equivalent freehold property.
Jan 26th 2014, 5:35 am
#5
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Joined: Aug 2004
Posts: 4,754
Re: Tax advice - depreciation
I think but am not certain that leasehold/commonhold?? may just possibly exist in the Commonwealth of Massachusetts - but whether or not the same legal concept exists in the States is not hugely relevant. Foreign property; excluding land, is depreciated over a 40 year life.
Jan 26th 2014, 5:43 am
#6
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Joined: Jun 2008
Location: San Francisco Bay Area
Posts: 10,678
Re: Tax advice - depreciation
26½ years, if in the US, or 40 years if overseas.
I suspect that the thorny issue at the heart of the problem is the distinction between a rented property and a leasehold property. You certainly CANNOT depreciate a building if you are only renting it, but "leasehold" is not common in the US (and may not exist at all?), so the advice given may be from someone confusing "leasehold" with a house that you are leasing.
I think you need professional advice before submitting a tax return, but given that with a British leasehold, you DO own the building, I believe that a leasehold building in the UK should be depreciable over the same period as an equivalent freehold property.
I suspect that the thorny issue at the heart of the problem is the distinction between a rented property and a leasehold property. You certainly CANNOT depreciate a building if you are only renting it, but "leasehold" is not common in the US (and may not exist at all?), so the advice given may be from someone confusing "leasehold" with a house that you are leasing.
I think you need professional advice before submitting a tax return, but given that with a British leasehold, you DO own the building, I believe that a leasehold building in the UK should be depreciable over the same period as an equivalent freehold property.
http://www.hawaiihomes1.com/leaseholdresidential.php
Also the western half of Palo Alto is almost entirely leasehold business properties owned by Stanford University.
Last edited by Michael; Jan 26th 2014 at 5:45 am.
Jan 26th 2014, 8:19 am
#7
Retired
Joined: Apr 2004
Posts: 34,649
Re: Tax advice - depreciation
26½ years, if in the US, or 40 years if overseas.
I suspect that the thorny issue at the heart of the problem is the distinction between a rented property and a leasehold property. You certainly CANNOT depreciate a building if you are only renting it, but "leasehold" is not common in the US (and may not exist at all?), so the advice given may be from someone confusing "leasehold" with a house that you are leasing.
I think you need professional advice before submitting a tax return, but given that with a British leasehold, you DO own the building, I believe that a leasehold building in the UK should be depreciable over the same period as an equivalent freehold property.
I suspect that the thorny issue at the heart of the problem is the distinction between a rented property and a leasehold property. You certainly CANNOT depreciate a building if you are only renting it, but "leasehold" is not common in the US (and may not exist at all?), so the advice given may be from someone confusing "leasehold" with a house that you are leasing.
I think you need professional advice before submitting a tax return, but given that with a British leasehold, you DO own the building, I believe that a leasehold building in the UK should be depreciable over the same period as an equivalent freehold property.
