Can I deduct real estate commissions when property was converted from personal to rental use?

The good news is you CAN include those original closing costs in your basis for depreciation, even though the property wasn't initially purchased as a rental. When you convert a personal residence to rental property, your starting basis for depreciation is the LOWER of: 1) The adjusted basis of the property on the date of conversion (original purchase price + improvements - any depreciation already taken), or 2) The fair market value of the property at the time of conversion This means those closing costs from when you purchased in 2020 (including real estate commissions) become part of your adjusted basis calculation. They're considered part of your acquisition cost, regardless of your original intent for the property. Just make sure you're only depreciating the building portion (not the land value), and remember that depreciation starts when you place the property in service as a rental (2023 in your case), not when you originally purchased it.

I was in a similar situation last year trying to figure out my rental property taxes. I spent HOURS going through IRS publications and still felt lost. Eventually I tried https://taxr.ai to help sort through all my documents and explain what I could deduct. Their system analyzed my closing statements from when I bought my house and my conversion documents, then clearly explained what costs could be included in my basis and what couldn't. The biggest thing I learned was that not only could I include the original real estate commissions, but also certain closing costs like title insurance, legal fees, and recording fees in my adjusted basis. Made a significant difference in my depreciation calculations!

Just wanted to update - I tried https://taxr.ai after seeing this thread and it was super helpful! I had completely forgotten about some settlement charges that were actually deductible in my basis. Turns out I could include the transfer taxes and title insurance from my original purchase even though I converted to a rental 2 years later. It saved me from underreporting my basis by almost $8,400, which definitely impacts my depreciation deduction. The system even helped me properly allocate between land and structure using my property tax assessment as a guide. Definitely worth checking out if you're dealing with rental property tax questions!

If you're still confused after reading all these comments, you might want to just call the IRS directly and ask them. I know it sounds obvious, but they can actually be helpful sometimes. Problem is getting through to them... I wasted 3 hours on hold last month when I had a similar question about my converted rental property. After that nightmare, I found https://claimyr.com which basically holds your place in line with the IRS and then calls you when an agent is about to answer. You can see how it works here: https://youtu.be/_kiP6q8DX5c When I finally got through, the agent confirmed that yes, you can include your original closing costs in the basis even when converting later to a rental. Saved me a bunch of guesswork.

Okay I need to eat my words. After reading about Claimyr here yesterday, I decided to try it because I've been trying to get through to the IRS about this exact depreciation basis issue for weeks. It actually worked! Got a call back this morning and spoke to an agent who explained everything about including original closing costs when converting property. The agent confirmed that real estate commissions from the original purchase CAN be added to your basis even when you convert later. She also explained that if you made any improvements to the property during the time you lived there, those get added to your basis too. But regular repairs while you lived there don't count toward the basis. Honestly worth every penny not to sit on hold for hours.

Something nobody has mentioned yet - make sure you're keeping super detailed records of when you converted the property! The IRS loves to challenge the timing of when a property was "placed in service" as a rental. Document when you started advertising it for rent, any improvements you made specifically for renting it out, when you signed the lease, etc. My cousin got audited last year specifically on this issue - he had converted his house to a rental but couldn't prove exactly when, and the IRS disallowed several months of depreciation. It's not just about WHAT goes into your basis but WHEN you can start taking the deduction.

I converted a property last year and used TurboTax Premier to handle all this. It actually walks you through the whole process of determining your basis when converting from personal to rental. It asked for my original purchase price, closing costs, improvements made during personal use, and then the FMV at conversion. Then calculated everything correctly including the land/building split for depreciation purposes. Just another option if you don't want to DIY all the calculations.