In response to a question from Lisa Foster on Part II of the blog, she asked if there was a worksheet to track the cost basis. I have found no universal worksheet that could be used in all circumstances. If you would like me to send you an example of a Cost Tracker, please email me at jim@MarshallPC.com and I will be happy to send you a Cost Tracker Worksheet which will be very helpful.

I created a table that shows the kind of reconciliation that should be kept on single family rental unit. Obviously, some schedules will be more complex for certain assets depending on the asset, its use and improvement needs. For example, a commercial rental might have leasehold improvements that are depreciated and written off based on tenants, rental term, and could be tracked on a separate worksheet as long as it was included in any disposition of the underlying asset so that it would still be part of the remaining allocated costs of aggregate the property if it were sold. Likewise, the depreciation might be subject to depreciation recapture and allocation between long-term capital gain and ordinary income.

You might have reductions in the basis for forgiveness/discharge of debt (Form 1099-C) that reduces the basis of the asset and thereby non-taxable and included on your Form 982. Again this may create a book/tax difference for entities that report to the public.

Likewise, if the property was acquired in a 1031 exchange the book and tax basis of each might be substantially different based on the Form 8824 for the like kind exchange.

Don’t forget about any deferred losses from real estate investments as a result of 1) not qualifying as a real estate professional, 2) income in excess of the personal income phase out, and 3) if you have net operating losses for which you did not get any benefit for the real estate losses consider the adjustment for the unrecognized losses and also adjust the NOL available.

Another good practice is to also keep track of the repairs and maintenance costs expensed each year on Schedule E page one for each rental to support routine maintenance deductions versus capitalization criteria.  This would be particularly vital for real estate held a number of years prior to the IRS normal retrieval period.