Cost basis for personal residence converted to rental property

[TaxDIY1]

I purchased a house in 2017 and lived in it as my primary residence until mid-2023, when it was converted to a rental.

For my 2023 tax filing, I used TurboTax to enter all the information about the rental income and expenses, including depreciation of the real estate asset (i.e., the house).

When I re-visited the 2023 tax return this year, I noticed that the cost basis for depreciation was the purchase price of the house in 2017, not the value when the house was put in service as a rental in mid-2023 (e.g., the assessed value or market value). Is that correct?

Or should I have entered the cost basis as the value of the house in mid-2023, when the rental started? If that is the correct choice, do I need to file an amended return for 2023 and notify the IRS of a change to accounting method via Form 3115?

For what it's worth, the market value of the house increased ~50% between 2017 and 2023, so there is a big difference.

[MarilynG1 · Accepted solution]

No, you were correct to enter the Cost Basis of the property as what you paid for it.  If you made major improvements after purchasing in 2017 and before renting in 2023, those could be added to the Cost Basis.

If this doesn't apply, you don't need to amend your return or change your accounting method with the IRS with Form 3115.

Remember, although you may get less depreciation this way annually, you'll have less of a Capital Gain when you sell the home, when depreciation taken is recaptured. Any improvements you add to the rental will be considered depreciable assets too. 

Here's more info on What is My Cost Basis?

@TaxDIY1 

[TaxDIY1]

Thank you so much @MarilynG1 for answering my question!

[DMarkM1]

Thank you so much for participating in today's Ask the Expert event!