Quick Answer
When converting your home to a rental, you depreciate the lesser of your adjusted basis or fair market value at conversion over 27.5 years. For a $400,000 home with $350,000 basis, annual depreciation would be $12,727, potentially saving $2,800+ in taxes depending on your bracket.
Best Answer
Robert Kim, Tax Return Analyst
Best for people who lived in their home and are converting it to a rental property for the first time
Use the lower of basis or fair market value at conversion
When you convert your personal residence to a rental property, the depreciable basis is the lesser of:
1. Your adjusted basis in the home (usually purchase price plus improvements minus any prior depreciation)
2. Fair market value at the time of conversion
This "lesser of" rule is crucial and often misunderstood, according to IRS Publication 527.
Step-by-step depreciation calculation
Example: Home conversion depreciation
Determining fair market value at conversion
You need professional documentation of FMV at the conversion date:
Keep this documentation permanently — you'll need it when you sell the property.
Land vs. building allocation
Only the building is depreciable — land never depreciates. You must allocate the total basis between land and building:
Common allocation methods:
When the home declined in value
If your home's FMV at conversion is less than your adjusted basis, you use the lower FMV for depreciation. This limits your annual deductions but protects you from "phantom income" when you sell.
Example: Declined value scenario
Starting depreciation — the conversion date
Depreciation begins when the property is placed in service as a rental — typically when you first make it available for rent, not when you find a tenant.
Mid-year convention: Use the mid-month convention for the first year. If you convert in June, you get depreciation for 6.5 months in Year 1.
Form 4562 and ongoing reporting
Year 1: File Form 4562 (Depreciation and Amortization) with detailed calculations
Subsequent years: Report depreciation directly on Schedule E, Line 18
Keep detailed records of:
What you should do
1. Get professional FMV documentation at conversion (appraisal or CMA)
2. Determine land/building allocation using tax assessments or appraisal
3. Calculate annual depreciation using the lesser of basis or FMV
4. File Form 4562 in the first year, then report on Schedule E
5. Maintain permanent records — you'll need them at sale
[Get a refund estimate →](refund-estimator) to see how much depreciation could increase your refund for amended returns.
Key takeaway: Converting a home to rental requires depreciating the lesser of your adjusted basis or fair market value at conversion, spread over 27.5 years, with proper documentation being crucial for future tax compliance.
*Sources: [IRS Publication 527](https://www.irs.gov/pub/irs-pdf/p527.pdf), [IRS Publication 946](https://www.irs.gov/pub/irs-pdf/p946.pdf)*
Key Takeaway: Use the lesser of your adjusted basis or fair market value at conversion, allocate between land and building, then depreciate the building portion over 27.5 years starting from the conversion date.
Depreciation basis calculation for different home conversion scenarios
| Scenario | Adjusted Basis | FMV at Conversion | Depreciable Basis | Annual Depreciation* |
|---|---|---|---|---|
| Home appreciated | $355,000 | $425,000 | $355,000 (lesser) | $10,327 |
| Home declined | $380,000 | $340,000 | $340,000 (lesser) | $9,891 |
| Inherited property | $450,000 | $475,000 | $450,000 (lesser) | $12,273 |
| Partial conversion (30%) | $400,000 | $450,000 | $120,000 (30% of basis) | $3,491 |
More Perspectives
Robert Kim, Tax Return Analyst
Best for people who inherited a home and are converting it to a rental property
Inherited property gets special basis treatment
When you inherit a home and convert it to rental, you get a "stepped-up basis" equal to the property's fair market value at the date of death (or alternate valuation date). This is often much higher than the original owner's basis.
Calculating depreciation on inherited property
Example: Inherited home conversion
The stepped-up basis often results in much higher depreciation than if you had purchased the property yourself.
Documentation requirements for inherited property
Maintain records of:
Multiple heirs situation
If you inherited partial ownership and bought out other heirs:
Key takeaway: Inherited properties receive stepped-up basis equal to FMV at death, often resulting in significantly higher annual depreciation deductions than purchased properties.
Key Takeaway: Inherited properties receive stepped-up basis equal to fair market value at death, typically resulting in higher depreciation deductions than originally purchased properties.
Robert Kim, Tax Return Analyst
Best for experienced investors who have converted multiple properties and need to understand complex situations
Advanced conversion scenarios and strategies
Experienced real estate investors often face complex depreciation situations when converting multiple properties or dealing with partial conversions, mixed-use properties, and cost segregation opportunities.
Partial conversion and mixed-use properties
When converting only part of your home to rental (like a basement apartment), allocate basis based on square footage or fair rental value:
Example: Partial conversion
Cost segregation opportunities
For high-value conversions, cost segregation studies can accelerate depreciation by identifying components with shorter lives:
Example with cost segregation:
Section 1250 recapture planning
When you eventually sell converted rental properties, depreciation recapture taxes the depreciation at 25% (plus state taxes). Plan for this:
Entity planning for multiple conversions
Holding converted rentals in LLCs or other entities can provide:
Key takeaway: Advanced conversion strategies include partial conversions, cost segregation studies, depreciation recapture planning, and entity structures, each requiring sophisticated record-keeping and professional guidance.
Key Takeaway: Advanced conversion strategies include cost segregation studies to accelerate depreciation, careful planning for Section 1250 recapture, and entity structuring for multiple properties.
Sources
- IRS Publication 527 — Residential Rental Property
- IRS Publication 946 — How to Depreciate Property
Reviewed by Robert Kim, Tax Return Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.