Converting to Rental

Today TaxMama® hears from Connie in the TaxQuips Forum with this question “What is the cost basis that should be used for property that had a HUD cost of $63,000 back in 1997 when the current owner acquired it? It was recently (2011) converted to a rental property. The 2011 value of the property is $305,000. This was never considered the owners main residence but was used to house other family members over the years. Finally would it make a difference if the owner had lived in the property at anytime in the last 14 years?”

Ask TaxMama

Hi Connie,

When you convert to rental, the basis is the LOWER of cost or market.

So…cost was $63,000 back in 1997.
Add in any significant improvements – driveway, pool, etc.
Deduct the cost of land.

And ta daaaa…rental depreciable basis.

The other stuff, about family use? Basically that means it was used personally. That’s about it.

It’s a common misconception to think that you can use the higher basis of current fair market value. In fact, when I was young and naïve, I made that mistake in an article over 25 years ago. Interestingly enough, at the time, not a single person wrote in to correct it. Today? A glaring error like that would be impossible to overlook.

And remember, you can find answers to all kinds of questions about rental properties, basis, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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