Converting a primary residence into rental property?
Maybe one day you’ll sell your home, but for now you’ve decided to rent it out. You might be able to shelter some of the rental income with tax deductions and depreciation write-offs. First you’ll have to navigate the complicated tax issues that come along with such a transition.
When you convert a primary residence into a rental property, many questions arise regarding the property’s depreciable basis. You’ll need to take into account whether the property was placed in service. You’ll also need to decide which depreciation method to use.
The basis for depreciation purposes is the lower of:
- The adjusted basis on the date of conversion (purchase price + capital improvements), or
- The fair market value of the property at the time of the conversion
Residential property is depreciated on a straight-line basis over 27.5 years beginning on the conversion date. The date placed in service as a rental is when the property is first available for rent, not when it is actually rented.
Obtaining an appraisal is often prudent. It helps establish the depreciable basis. The appraisal will also support the gain or loss reported on a subsequent sale.