Question:
We purchased personal use foreign property in July 2012 for $300,000. On 1/1/14, the property was converted to rental use. It was rented out for three months in 2014. For purposes of setting up this rental property to calculate depreciation, should I use the exchange rate as of July 2012 or 1/1/14? Also, can you confirm that foreign rental property should be using ADS depreciation method with mid-month convention.
Answer:
The exchange rate used is dependent on the depreciable base for the property. As you may note per IRS Publication 527, the lower of the FMV or cost basis is used to start depreciating the property. You should use the exchange rate in the year you purchased the property to determine your cost basis. You would then compare that amount to the FMV in USD in the year you started depreciating the real estate. You can use the lower of the FMV or cost basis to start depreciating the property. We presume it will likely be the cost basis exchange rate as of the purchase date.
As you may note, the depreciation should begin when the property is ready and available for rent as per IRC Section 167.
In addition, under IRC Section 168(g)(1)(A) the foreign property should use the ADS method over a 40 year period.
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References:
IRC Section 168(g)(1)(A); IRC Section 167; IRS Publication 527
