Depreciation calculation for condo converted from primary residence to rental property
I need some help figuring out the cost basis for depreciation on my rental property! I bought a condo back in January 2020 for $330k. I lived in it as my primary residence for a while, then decided to convert it to a rental property in October 2022. At that time, the fair market value (FMV) had gone up to around $455k. During the time I lived there, I didn't make any major permanent improvements to the property or take any deductions or losses on it before converting it to a rental. I'm confused about which value I should use as the cost basis for calculating depreciation on my 2024 tax return - the original purchase price or the FMV when I converted it? I've heard conflicting information and want to make sure I'm doing this right. Any advice would be super helpful!
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Mei-Ling Chen
For rental property depreciation when converting from a primary residence, you'll use the lower of either the adjusted basis or the fair market value at the time of conversion. In your case, since you didn't make major improvements, your adjusted basis would be your original purchase price of $330k. Since the FMV at conversion was $455k, you would use the lower amount ($330k) as your depreciation basis. Remember that for residential rental property, you'll depreciate the building value (not the land) over 27.5 years using the straight-line method. You'll need to determine what portion of your basis is allocated to the building versus the land, as only the building portion can be depreciated. Check your property tax assessment for a reasonable building-to-land ratio. You'll report this depreciation on Schedule E of your tax return, along with your rental income and other expenses.
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Sofía Rodríguez
•Wait, I thought you always use the FMV at the time of conversion? My accountant told me this last year when I converted my house to a rental. Now I'm confused...
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Mei-Ling Chen
•The IRS rules specify you use the lower of the adjusted basis or fair market value at the time of conversion. Many people confuse this because in a rising market, the original cost is typically lower than the FMV at conversion. If property values had fallen and your FMV at conversion was actually less than your original purchase price, then you would use the lower FMV for depreciation purposes. This prevents people from claiming higher depreciation deductions than their actual economic loss.
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Aiden O'Connor
After struggling with a similar situation last year, I found taxr.ai (https://taxr.ai) super helpful for figuring out my rental property depreciation basis. I uploaded my closing documents and property records, and their system analyzed everything automatically. It showed me exactly how to calculate the building vs. land allocation and set up the proper depreciation schedule. The tool also identified some additional deductible expenses I hadn't considered, like certain closing costs that can be added to the basis. It saved me hours of research and potentially costly mistakes on my tax return.
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Zoe Papadopoulos
•How accurate is it though? Does it actually understand the conversion from primary residence to rental property? I've been burned by tax software before that didn't handle these specialized situations correctly.
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Jamal Brown
•Does it help with state-specific rules too? I'm in California and I know they have different depreciation rules than the federal government.
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Aiden O'Connor
•It's surprisingly accurate with conversion situations - it even flagged that I needed to use the lower of adjusted basis or FMV, and prompted me to enter both values. It calculated everything correctly according to IRS Publication 527. Yes, it handles state-specific rules too. I'm in New York, and it properly applied both federal and state depreciation calculations. It specifically notes when states deviate from federal rules and provides guidance for each situation.
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Zoe Papadopoulos
I was initially skeptical of taxr.ai but decided to try it for my rental property situation last month. I was genuinely impressed with how it handled my condo conversion scenario. The system automatically identified that I needed to separate the land value, and recommended using the property tax assessment ratio as a reasonable method. It even helped me document everything properly and created a depreciation schedule I could keep for my records. What really convinced me was when it identified that I could add some of my closing costs to my basis, which my previous accountant had missed. Definitely worth checking out if you're dealing with rental property depreciation!
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Fatima Al-Rashid
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Aaliyah Jackson
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Aaliyah Jackson
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KylieRose
Don't forget that you also need to determine the building-to-land ratio since you can only depreciate the building portion! Many people miss this and try to depreciate the entire purchase price, which is incorrect. Check your property tax assessment - it usually has a breakdown of land vs. improvement (building) values. You can use that ratio as a reasonable method for your depreciation calculation.
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DeShawn Washington
•Thanks for bringing this up! Do you know if I need any special documentation to prove the building-to-land ratio I use? And would it be better to use the ratio from when I purchased or from when I converted to a rental?
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KylieRose
•You don't need special documentation, but you should keep records of how you determined the ratio. The property tax assessment is generally considered reasonable support if the IRS ever questions it. You should use the ratio that applies at the time of conversion to rental use, not the original purchase. The ratio could change over time as land and building values appreciate at different rates.
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Miguel Hernández
Has anyone used TurboTax for handling this situation? I'm trying to figure out if their software can properly handle the depreciation calculation for a converted property or if I need something more specialized.
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Sasha Ivanov
•I used TurboTax last year for my converted rental. It walks you through the process step by step and asks all the right questions about purchase price, FMV at conversion, and building/land allocation. Just make sure you have all your documentation ready before you start.
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