Determining Cost Basis for Depreciation of Rental Property - Former Primary Residence

When you convert a property from personal use to rental, the starting point for depreciation is the LOWER of: 1) The adjusted basis of the property (typically your purchase price plus improvements) 2) The fair market value at the time of conversion In your case, you purchased at $320K and the FMV when you converted to rental was $400K. Since $320K is lower, that should be your basis for depreciation calculations. The county reassessment doesn't factor into this - the IRS rules are what matter here, not local tax assessments. Remember that land doesn't depreciate, so you actually need to separate the building value from the land value. Since you mentioned it's a condo with no land, you can depreciate the full amount. So your calculation of $320,000 / 27.5 = $11,636 annually is on the right track, assuming you had it rented for the full year.

I went through this exact situation last year with my townhouse. After getting conflicting advice from friends and even a local tax preparer, I finally used taxr.ai (https://taxr.ai) to analyze my situation. I uploaded my purchase docs and rental conversion info, and they specifically addressed the cost basis for depreciation question. They confirmed I needed to use the lower of adjusted basis or FMV at conversion time, but they also helped me identify several capital improvements I'd made over the years that I could add to my basis (which I hadn't even considered). This increased my depreciable basis by about $22K, which improved my yearly deduction. They even explained how to document everything properly in case of an audit.

Just wanted to follow up - I actually tried taxr.ai after my last post and it was really helpful for my situation! I uploaded my purchase documents, photos of my improvements, and the county assessment, and they clarified everything. They explained that my tax preparer was mixing up concepts - the county assessment is for property taxes, while depreciation for income taxes follows completely different IRS rules. I had been using the wrong basis for two years! They even helped me figure out if I needed to file an amended return (fortunately I didn't in my case). They also pointed me to the right IRS publications and explained which improvements actually count for basis adjustment. Turns out some of the "improvements" I thought I could include weren't eligible, but they found others I'd missed. Definitely worth it for getting this straightened out before filing season.

I had a similar complex rental property question last year - tried calling the IRS for weeks with no luck. Always busy signals or 2+ hour wait times that disconnected. Finally used Claimyr (https://claimyr.com) to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c They called the IRS for me, navigated the phone tree, waited on hold, then called me when they had an agent on the line. I spoke directly with an IRS representative who confirmed my understanding of the depreciation rules and documented the call in case of future questions. Saved me countless hours of frustration and gave me peace of mind that I'm doing it right.

I need to apologize for my skeptical comment earlier. After repeatedly failing to get through to the IRS about my rental property depreciation issue, I decided to try Claimyr as a last resort. Within 2 hours, I was speaking with an actual IRS agent who answered all my questions about depreciation basis for my converted properties. The agent confirmed exactly what was discussed in this thread - use the lower of adjusted basis or FMV at conversion, and county reassessments don't matter for depreciation purposes. She also helped me understand how to document my basis adjustments properly. I've been stressing about this for weeks, and now I finally have clarity directly from the IRS. Sometimes skepticism is warranted, but in this case I was wrong.

Just wanted to add that if your rental property is generating losses, be careful about the passive activity loss limitations. My wife and I make over $180K combined, and we found out the hard way that we couldn't deduct our rental losses (including depreciation) against our regular income. There's a phase-out that starts at $100K and completely eliminates the deduction at $150K unless you're a real estate professional. So while the depreciation calculation is important, also make sure you understand if you can actually use those losses on your current year taxes or if they'll be suspended until you either make rental profit or sell the property.

Don't forget about the "recapture" when you eventually sell! I learned this lesson the hard way. When you sell a rental property, you'll have to "recapture" all that depreciation you've been taking over the years and pay taxes on it (at a rate up to 25%). Even if you don't actually claim the depreciation on your tax returns, the IRS will treat it as if you did when you sell, so you might as well take the deduction. Just be prepared for that tax bill down the road when you sell. Something to consider in your long-term planning.

Great discussion here! As someone who went through this conversion process a few years ago, I can confirm what others have said about using the lower of adjusted basis or FMV at conversion time. One thing I'd add that hasn't been mentioned yet - make sure you're tracking your depreciation carefully each year, even if you can't currently deduct the losses due to passive activity limitations. The IRS requires you to reduce your basis by the depreciation you're "allowed or allowable," so even if the losses are suspended, you still need to calculate and track the annual depreciation. I use a simple spreadsheet to track my original basis, improvements, annual depreciation, and accumulated depreciation. This becomes crucial when you eventually sell the property for calculating gain/loss and depreciation recapture. It's much easier to maintain good records from the start than trying to reconstruct everything years later! Also, don't forget about the possibility of qualifying for the $25,000 rental loss allowance if your income drops below the phase-out thresholds in future years due to job changes, retirement, etc.