Question about deprecation

[Jason Kimery]

I own my home and would like to buy a new home to live in while turning my current home into my first rental. I have significantly improved the value and it has probably appreciated a bit on its own. My question is does the depreciation i look forward to claiming go by the purchase price? Or do i get to reset the value and depreciate the much higher amount?

[Paul Caputo]

It depends how you go about it. If you simply convert it to a rental you must use the LOWER of the purchase price or the FMV to figure depreciation. In your case (as in most) it seems like the purchase price is lower than FMV.

Now if you do things a little differently you can use the FMV, but not everyone can make this work. You could form a wholly owned S corporation for the rental business. Then you sell the property to the S corp for FMV. You get cash on the sale and pay off your mortgage, The S corp now owns the property and has a new mortgage at FMV. Since the S corp paid FMV the depreciation would start from there instead of your purchase price.

If there's a big difference between your purchase price and FMV the additional costs incurred by doing this are more than worth it, but if there isn't a big difference it could be a wash or cost you more than retaining ownership.

You need to look at you numbers to see if it's worth it to go through all that. Run the numbers with just converting it to a rental and selling to an S corp and see which one makes more sense.