The IRS requires that you use the LOWER of the original purchase price, or the fair market value when your primary home was converted to a rental.
However, there are other factors that must be considered in calculating the gain/loss on a rental that was originally your home.
If a residence converted to a rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken. If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)).
This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property.
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