When you change property you held for personal use to rental use, the basis for depreciation will be the lesser of the FMV or adjusted basis on the date of conversion.
Fair Market Value is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the FMV of the property.
The basis for depreciation is the lesser of:
- The FMV of the property on the date you changed it to rental use; or
- Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis.
Typically, the percentage of land versus building from your local assessor is a good source to determine the percentage of basis attributable to land. You can use the assessment from the time you put the property into service. Remember that depreciation taken will eventually be recaptured at such time as you figure the gain on selling the property.
You would only need to choose a method for allocating the percentage of space per room or in the entire house if you were only converting part of the house to rental use, or using part of the house as a home office. Either square footage or number of rooms is an acceptable method,
See IRS Publication 527 for more information.
See here for more information from TurboTax on rental property.
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