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Conversion of Residence into Rental Property

Posted by Traci A. Malik Posted on Sept 13 2016

We get a lot of questions about this topic. Some taxpayers decide to move and rather than sell their current home, they convert it into a rental property. There are special rules regarding this situation come tax time.

Basis for Depreciation – you are allowed to take a deduction for the depreciation of the home once it is an placed into service as a rental property. The figure used for a converted property is the lower of either the fair market value of the property when converted or the adjusted basis of the purchase price. The adjusted basis is the amount you paid for the property plus any capital improvements.

Deductions – any expenses you pay for the property while a rental property are deductible. For example: association dues, repairs, mortgage interest, property taxes. 

Loss Limitations – there are limitations in place if you have rental losses. Rental activity is considered a passive activity. As such, the deductions are allowed up to the amount of income collected unless you actively participate in the activity. If you actively participate then up to $25,000 of losses can be claimed unless your modified adjusted gross income is above the phase-out limit of $150,000 (married filing jointly). These un-allowed losses are carried forward.

Sale of Property – a special rule is in place for converted properties. The figure used will depend if the sale is a loss or gain. If the converted property is sold at a gain, the basis used is the adjusted tax basis. If the sale results in a loss, the basis is the lower of the adjusted tax basis at the time of the conversion or the fair market value when converted.


For more help on converting your residence into a rental property, contact Jones and Company CPAs P.A. at 727-845-4166.