The conversion basis rule
When you convert your primary residence to a rental, your depreciable basis is the lower of two amounts: (1) your adjusted cost basis — original purchase price plus improvements minus any prior casualty losses, or (2) the fair market value of the property on the conversion date. You then subtract the land value from whichever figure is lower to arrive at the depreciable building basis.
Example: You bought your home for $220,000 (with $40,000 attributable to land), added $30,000 of improvements, and the FMV is $380,000 when you convert. Adjusted cost basis = $210,000 (building only). FMV at conversion = $340,000 (building only). Depreciable basis = $210,000 — the lower of the two. You do not get to depreciate the $130,000 of unrealized gain.
The placed-in-service date
Depreciation starts on the date the property is available for rent — not the date a tenant moves in. If you finish repairs, list it for rent on September 15, and a tenant moves in October 1, your depreciation clock starts September 15 using the mid-month convention for that month.
Make sure you document the conversion date clearly: listing date, rental listing ads, or property manager engagement letters all work. The IRS has challenged conversions where the property sat vacant with personal belongings still inside.
Section 121 and recapture interactions
The period you lived in the home can still count toward the Section 121 exclusion (up to $250,000/$500,000 of gain) if you sell within five years of conversion — subject to the non-qualified-use rules for any time rented after 2008. Depreciation claimed during the rental period is recaptured at up to 25% and is not sheltered by the Section 121 exclusion.
Frequently asked questions
What basis do I use for depreciation on a converted home?
The lower of your adjusted cost basis or the fair market value on the date of conversion, minus land in either case.
When does depreciation start on a converted home?
On the date the property is ready and available for rent — not when a tenant actually moves in.
Do I get credit for appreciation when calculating depreciation?
No. If your home appreciated before conversion, that appreciation does not increase your depreciable basis. You lose those gains to the lower-of-cost-or-FMV rule.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.