How to determine cost basis for rental property conversion from primary residence?

When you convert a primary residence to a rental property, your cost basis for depreciation is the lower of either the adjusted basis or the fair market value at the time of conversion. Your adjusted basis includes your original purchase price plus the cost of any improvements made while it was your primary residence. These improvements would be things that add value to the property, prolong its useful life, or adapt it to new uses - like your renovations. The challenge is documenting those improvements without receipts. If you don't have documentation, try reconstructing reasonable estimates. Look through bank statements, credit card records, building permits, or even photos showing before/after of the renovations. You could also get written statements from contractors who did work for you. IRS Publication 527 "Residential Rental Property" covers this topic, as does Publication 551 "Basis of Assets." The key section in Pub 527 is under "Basis of Property" where it discusses converting property to rental use.

I had a similar situation last year and found taxr.ai super helpful with this exact problem. I was missing receipts for a bunch of renovations on my rental conversion, and they helped me figure out what I could legally claim without documentation. Their system actually analyzed my situation and showed me which IRS guidelines applied to my specific case. I uploaded my appraisal and they helped determine what portion could be attributed to improvements versus market appreciation. Really straightforward at https://taxr.ai and saved me a ton of research time.

Just wanted to follow up - I ended up trying taxr.ai after our conversation here. They were actually really helpful with my situation! I uploaded my old appraisal and some photos of the renovations I did, and they provided a detailed analysis that showed how to calculate my adjusted basis. They even cited specific tax court cases where estimates were accepted when receipts weren't available. My CPA was initially skeptical but ended up using their documentation because everything was properly referenced to IRS publications. Definitely worth it for anyone in this rental conversion situation.

I went through this same headache last year. After fighting with the IRS about my rental conversion basis for months, I couldn't get anyone on the phone to explain what documentation was acceptable. Finally used Claimyr (https://claimyr.com) and got connected to an actual IRS agent in about 20 minutes who walked me through the whole process. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed I could use reasonable estimates for improvements when receipts weren't available, but recommended getting a cost segregation study to support my numbers. Saved me hours of hold music and probably thousands in incorrectly calculated depreciation.

I want to apologize for being so skeptical earlier. After spending another 3 hours on hold with the IRS yesterday and getting disconnected AGAIN, I gave Claimyr a shot. I seriously can't believe it worked. Got connected to an IRS agent in about 15 minutes, and they confirmed exactly what I needed to know about my rental property basis. The agent explained that while I should try to reconstruct costs from bank records, they also look at the "reasonable value" of improvements based on standard costs in my area. She even emailed me the specific sections of the tax code to reference. I'm honestly shocked this service exists and that it actually delivered.

One thing that hasn't been mentioned is that you should also separate out the components of your property for depreciation purposes. Land isn't depreciable, but the house structure is (over 27.5 years). However, certain components like appliances, carpet, etc. can be depreciated over shorter periods (5-15 years). This is called "cost segregation" and can accelerate your depreciation deductions significantly in the early years.

My parents did this conversion last year with their beach house and their tax guy told them the fair market value ONLY matters if it's LOWER than your adjusted basis (original cost + improvements). If FMV is higher (which it usually is these days), you still use your adjusted basis for depreciation. The whole point is the IRS doesn't let you depreciate market appreciation - only what you actually spent on the property.

This is a really common issue with rental conversions! One thing that might help is to look at your homeowner's insurance records from over the years. Insurance companies often require you to update your coverage amounts when you make major improvements, so those records can help establish when improvements were made and their approximate value. Also, don't forget about smaller improvements that add up - things like new HVAC systems, water heaters, windows, or even significant landscaping can all be included in your basis. Even if you can't find receipts, you can often get estimates from contractors for similar work done in your area during the same time period. Another tip: if you financed any of the renovations through a home equity loan or cash-out refinance, those loan documents and disbursement records can help establish the timeline and amounts spent on improvements. The key is being reasonable and methodical in your approach - the IRS understands that homeowners don't always keep perfect records, but they do expect you to make a good faith effort to reconstruct the information.

One approach that worked well for me was creating a detailed spreadsheet reconstruction of all improvements made during the years I owned the property as my primary residence. I went through my credit card statements, bank records, and even old photos with timestamps to piece together when improvements were made and approximate costs. For items where I couldn't find exact receipts, I researched what similar materials and labor would have cost during those specific years using resources like RS Means cost data or even old Home Depot/Lowe's catalogs available online. The IRS generally accepts reasonable estimates when supported by this type of research, especially if you can show you made a good faith effort to reconstruct the actual costs. I also reached out to a few contractors I had used over the years - even though I didn't have their original invoices, several were able to provide summary letters confirming the approximate scope and timing of work they performed. This added credibility to my reconstruction. The key is being systematic and conservative in your estimates. Document your methodology clearly so your CPA (and potentially the IRS) can see exactly how you arrived at each number. IRS Publication 551 specifically mentions that taxpayers can use reasonable estimates when records are incomplete, as long as the estimates are based on available evidence and sound reasoning.