I disagree with DDollar.
In IRS Publication 551 it states:
[removed]
If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home.
Basis for depreciation.
The basis for depreciation is the lesser of the following amounts.
The adjusted basis is the price you paid, plus improvements and certain closing costs. The FMV could be higher or lower. But this also means that using the assessed value wasn't quite right, either (this is the mistake that I made when I converted my main home, purchased at $250,000 to a rental property, which had a FMV of $235,000). Use the assessed value of the structure and the land to figure out their percentage of the cost. In my case, the assessed value of my real property was $225,880 of which $70,000 was land(!), so I should have used the 69% ($155,880) on the FMV at the time to get my starting basis for depreciation.
I saw somewhere that the statute of limitations is 3 years (maybe the limit on amending prior year tax returns?) so I think it's too late to go in and fix it.
The downside is that with depreciation from a lower starting cost, when you sell it's likely to look like you have a capital gain, plus that depreciation recapture. My capital gain looked at least $10,000 higher than it should have been. However, keep track of your Schedule E, line 26. If you have losses, they carryover until they cancel out gains or you dispose of the property, at which point the PAL reduces your taxable income.
