Basis for depreciation when moving a home I own to rental status

[Daniel Kotowski]

I purchased a home about 5 years ago for $365,000 and today the home is worth $650,000. I'm buying another home and renting out this one. Will my depreciation be based on the purchase price or what it is worth now?

[Michael Moy]

Quote from @Daniel Kotowski:

I purchased a home about 5 years ago for $365,000 and today the home is worth $650,000. I'm buying another home and renting out this one. Will my depreciation be based on the purchase price or what it is worth now?

 The following is from Stessa in regards to your situation:

"The cost basis used for depreciation in this situation is the purchase price of the home plus certain closing costs, plus qualified capital improvements (such as a new roof or other renovations). Alternatively, you can use the fair market value of the home at the time of conversion"

Keep in mind, you will probably want to talk to a tax professional to go over all the consequences.  By turning it into a rental, you may be on the hook for capital gains tax in the future vs using the 250k exemption for single filer or 500k for a married couple that files together on capital gains if you were to sell now.  The exemption is applied to people that have lived in the house for 2 of the last 5 years.  Most of the time, you are better off selling the home and getting the proceeds tax free and using that to buy a rental. In addition you can identify a property that performs better as a rental as yours most likely was purchased as a place you would like to live in and not what works best as a rental property.

[Wayne Brooks]

@Daniel Kotowski No…you can not use current value…you use your actual basis. It is actually your actual basis or current appraisal…whichever is Lower.

[Mike Dymski]

If this was your primary residence, I would highly recommend selling within 3 years of converting to a rental to maintain the section 121 tax free gain on sale of a primary residence (250k exclusion for single and 500k married).  Your decision to post this question may have saved you 50-100k in taxes.

[Basit Siddiqi]

It will be based on original purchase price + improvements made to the house while you lived in it.