How to calculate basis for my residence turned rental property when selling

When you sell a residence turned rental property, your basis is basically split into two parts. You'll use the original purchase price (plus improvements made while you lived there) as your starting basis. But for calculating the gain, you use the LOWER of either the fair market value at the time of conversion OR your original adjusted basis. Here's what you need to do: Figure out what the property was worth when you converted it to a rental 5+ years ago. Compare that to your original cost basis (purchase price plus improvements). The lower of those two numbers becomes your basis for the rental period. Also, don't forget that you've been taking depreciation deductions for 5+ years, which reduces your basis further. You'll have to recapture that depreciation when you sell (typically taxed at 25%). Since you lived there 20 years and rented it 5 years, you may still qualify for some capital gains exclusion if you've sold within 3 years of moving out, but it sounds like you're beyond that window now.

I was in a similar situation last year and found that using taxr.ai really helped me figure out the complicated basis calculations. I had owned my house for 15 years, lived in it for 9, then rented it out for 6 before selling. Had no idea how to calculate the basis properly or what documentation I needed. I uploaded my original purchase documents and some comparable sale listings from when I converted it to a rental on https://taxr.ai and it analyzed everything and showed me exactly how to calculate the adjusted basis. It also helped me figure out the depreciation recapture, which I completely forgot about! The tool explained that my basis would be the lower of my original purchase price or the FMV at conversion, which in my case was the original purchase price since property values had risen. Saved me tons of headaches and probably an audit.

Just wanted to update that I checked out taxr.ai after seeing the recommendation here. It was super helpful for my situation! I had converted my condo to a rental in 2020 and was stressing about selling it this year. I uploaded my purchase documents from 2012, some comparable sales listings from 2020 when I converted it, and my tax returns showing depreciation. The analysis showed me that my original basis was $185,000, but the FMV at conversion was around $260,000, so I needed to use the original basis for calculating gain. It also calculated my depreciation recapture amount. The most helpful part was that it created a detailed report showing exactly how to fill out Form 4797 and Schedule D for the sale. Definitely recommend if you're in this situation - it removed all the guesswork!

If you're having trouble getting clarity on your basis calculation, try Claimyr to get through to an actual IRS agent. I spent weeks trying to call the IRS directly about my rental property conversion basis issue last year and kept getting disconnected or waiting for hours. Finally used https://claimyr.com and they got me connected to the IRS in about 20 minutes. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent was actually really helpful and walked me through the whole calculation based on my specific situation. They confirmed that I needed to use my original purchase price (since that was lower than FMV at conversion), calculate my adjusted basis with improvements, and then account for depreciation. Made a huge difference in my tax bill because I was calculating it all wrong before.

I was super skeptical about Claimyr but got desperate after trying to reach the IRS for weeks about my rental property basis questions. Honestly, it worked exactly as advertised. Got a call back in about 25 minutes and was connected to an IRS agent who specialized in investment properties. The agent confirmed that I needed to use my original purchase price as basis since my home had appreciated during the time I lived there. He also explained that I needed to recapture all the depreciation I'd taken (and even depreciation I SHOULD have taken but didn't) at 25% tax rate. Most importantly, he told me exactly which forms to use and how to document everything. Saved me thousands in potential penalties for doing it wrong. The time saved was worth every penny considering I had wasted hours trying to get through myself.

Something important nobody mentioned yet - if your property decreased in value while you lived there (before converting to rental), you actually use the LOWER of your original cost or the FMV at time of conversion as your basis for depreciation/future gain. In other words, you can't convert a personal residence to a rental to claim a loss that happened during personal use. The IRS is smart about these things! Also, make sure you've been tracking all capital improvements separately from repairs. Improvements add to your basis, repairs don't. This can make a huge difference in your tax bill.

Has anyone used a 1031 exchange when selling a rental that was previously their primary residence? I'm in the exact same boat (lived in house 18 years, rented it out for 7 years, now selling) and wondering if I can defer the gains by buying another investment property.

This is a really complex situation that trips up a lot of people! Just to clarify a few key points that might help: 1. Your basis for calculating gain will be your original purchase price plus any capital improvements made during the entire ownership period (both personal and rental use). 2. The depreciation you've been taking for 5+ years will need to be "recaptured" when you sell - this means you'll pay tax on that depreciation at a 25% rate regardless of your regular capital gains rate. 3. Since you moved out more than 3 years ago, you unfortunately won't qualify for the $250K/$500K capital gains exclusion that applies to primary residences. 4. The good news is that any capital improvements you made during ALL 25 years of ownership (not just the rental period) will increase your basis and reduce your taxable gain. Make sure you have good records of the fair market value when you converted to rental - even if it's just comparable sales data or tax assessments from that time. The IRS may ask for documentation if audited. Consider consulting with a tax professional given the complexity and potential tax implications!