It depends.
According to IRS Pub
551 Property
Changed to Business or Rental Use:
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.
The basis for
depreciation is the lesser of the following amounts.
- The FMV of the property on the date of the
change, or
- Your adjusted basis on the date of the
change.
The best source for the Fair Market Value (FMV) on the date of the change would be a local real estate agent who can provide comparable sales. This is good evidence for the value of your home on that date.
Your adjusted basis in the Rental Property is the original purchase price plus any improvements (upgrades or additions) that you have made. Historical property tax records may provide the price you paid for the home. Look online for your county Tax Assessor website - many have historical records available online. Also, the original HUD/Closing documents would have this value. Improvement costs would come from your personal financial records.
In most cases, your adjusted basis would be less than the FMV, so that is the basis you would use for your Rental Property.
[revised]
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
