All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Trusted Pioneer
Posts: 5
Registered: ‎04-08-2017

Converting a home to a rental property

(Sorry re-post - I mistakenly put the post in HealthCare)

 

We moved from our old home to a new one out of state. We converted the old home to a rental property on January 1, 2016.

 

What do we use as basis for the new rental (old home).

      Should we use what we paid 17 years ago or the current valuation of the property.

      Can I use the Valuation of the property on my tax bill or do I need to put what the market value is?

 

      Is it better to over or under estimate the basis...I am worried if the value falls below the estimate it will hurt when we sell the property down the road

 

Highlighted
Neighbor
Posts: 72
Registered: ‎02-28-2016

Re: Converting a home to a rental property

I answered your other post.

The estimated value is used for calculating the depreciation on your tax return. It has nothing to do with any subsequent sales. Any gain (or loss) from a sale is determined by using the purchase price and improvements as the basis.

Associate (Pioneer)
Posts: 53
Registered: ‎03-22-2016

Re: Converting a home to a rental property

Dear benalex1:

 

In the case of a home converted from personal to rental property, the basis for depreciation is the LOWER of the adjusted basis or the fair market value (FMV) on the date of conversion.  For older homes in good condition, it is usually the adjusted basis (original cost + improvements).  In distressed areas, the FMV may be lower than the adjusted basis.  You start the depreciation on the date that the home is converted, not when it was first purchased.  Once the depreciation basis is established, it does not change in subsequent years, no matter what happens to the market value.  Improvements after the start of depreciation date (e.g. a new roof) are depreciated separately.

 

In either case, the portion representing the cost of the land is not depreciable.

 

When you sell the house, gain or loss is calculated using the original adjusted basis if the original basis is used for depreciation.  If the FMV is lower than the original adjusted basis, gain or loss calculation gets a little complicated and would be worth a consultation with a tax professional.

 

Hope the foregoing is helpful and not too complicated.

 

SimonT

(Tax Advisor)