For now, we will focus on the point in time when you converted the remaining 30% of the home to a rental property. On that date, your tax basis in the remaining 30% of the converted personal residence was the lesser of: (1) the property’s normal tax basis on the conversion date or (2) the property’s FMV on that date. The property’s normal basis usually equals the original purchase price plus the cost of improvements.
On the day of conversion let's say the FMV of the property was less than its tax basis. Then, for depreciation the FMV would become the basis and you would depreciate the basis allocable to the home — not the land — over 27.5 years using the straight-line method.
Regarding the loan, whether it is a mortgage or some other type of loan, such loan would just be part of the expenses you have in operating the property. You would not depreciate the loan. The way to handle the loan before you converted the entire property was to allocate 70% of the loan payments to the rental property as an expense. Now, because the entire property is a rental, you can allocate the entire loan as an expense in operating the rental.
@stellarun21
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