Tax implications of converting primary residence to rental

[Jiri Vetyska]

Can somebody clarify the tax implications or advantages of converting a primary residence to a rental and what should be paid attention to early on so as not to pay too much in taxes at a later sale?

Specifically if I buy a house that I spend a lot of money renovating while living there and then at some point later I decide to rent it out. How do I enter the property value for the depreciation purpose? The original at purchase, estimated at time of transfer? Anything to do about the expenses for renovation that I couldn't deduct in earlier years because it was not investment?

Thanks in advance!

[Natalie Kolodij]

Your basis for depreciation will be:

The purchase price of the actual house (take out the land value, that doesn't get depreciated) 

and then you adjust the basis for the following: 

Adjusted Basis

To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. The result of these adjustments to the basis is the adjusted basis.

Increases to basis. You must increase the basis of any property by the cost of all items properly added to a capital account. These include the following.

• The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year.
  • New roof, new kitchen, hardwood floors, ect. Items like paint don't increase basis. 
• Amounts spent after a casualty to restore the damaged property.
• The cost of extending utility service lines to the property.
• Legal fees, such as the cost of defending and perfecting title, or settling zoning issues.