Basis: Value when I purchased vs. when it became a rental?

[Ryan S.]

Hi everyone,

For the purposes of a 1031 Exchange, is the basis value:

a) the value when I purchased my condo (owner-occupied)

b) the value of the property when I moved out and converted it into a rental investment property

I have always assumed the answer was (A) but had a conversation with someone yesterday who suggested I look into this.  We lived there for three years, and the value climbed during that time.  If, in fact, basis should be the value when it was turned into a rental, I wouldn't be on the hook for the gain that occurred while we lived there.  This could be material in terms of our decision to do a 1031 or not.

Our taxes for the past three years have used the purchase value, but if it's possible to use the value upon conversion, I would look into amended returns for those years to correct basis.

For a SIMPLIFIED example, imagine value was $300K upon purchase, $400K upon conversion, and $500K now.  I sell today, is my basis $300 or $400?  A gain of $100K vs. $200K would be a real difference.