Cost basis for rental houses previously used as primary residences

K4 — Mon, 09 Mar 2026 11:22:47 GMT

We sold two houses in 2021, both of which were our primary residences before becoming rental properties. I am trying to determine the proper cost basis to use for them. When I completed the rental information using TurboTax Home and Business as I've done for years, I indicated that the properties were sold but was never prompted to enter sale information.

Situation A: House purchased in 2007 and used as primary residence until 2012 when it was converted to a rental. At that time, the house was valued BELOW the 2007 purchase price. I used that current market value as the rental basis (capital loss that was not taken on the primary residence). All rental depreciation from 2012 to 2021 was based on that fair market value from 2012.

Situation B: House purchased as new primary residence in 2012 and used as such until 2019 when it was also converted to a rental. At that time, the house was significantly ABOVE the 2012 purchase price. Again I used the current market value as the rental basis and took depreciation base on that value.

Now that we sold both houses, how is the cost basis determined for each? Further, we were renters ourselves from 2019 to 2021 but the house from situation B was in fact our primary residence for 3 of the 5 years prior to the 2021 sale.

I believe I can use the original purchase price of house A minus depreciation taken as a rental so as to be taxed only on the actual net gain and not on the capital loss between 2007 and 2012 that was recovered between 2012 and 2021.

I also believe that the fair market value in 2019 minus depreciation taken should be the basis for house B so as to roll the capital gains from our primary residence from 2012-2019 into our new primary residence purchased in 2021.

Please confirm that this thinking is logical or correct me. Also, please help me enter all of this information correctly - again, I am using the desktop version of Home and Business.

Thanks,

Ken

Re: Cost basis for rental houses previously used as primary residences

LeonardS — Sat, 09 Apr 2022 21:03:23 GMT

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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Cost basis for rental houses previously used as primary residences

Re: Cost basis for rental houses previously used as primary residences