PATRICK'S QUICK ANSWER
Yes, when you convert a home you owned into a rental, you can start depreciating the building over 27.5 years, and that lowers your taxable income. The key is the building value, not the land, based on the lower of your adjusted basis or fair market value at conversion. I weigh the years you rented it and your eventual sale, because depreciation gets recaptured. It is a powerful deduction, so set up the numbers correctly from day one.
When you convert a primary residence to a rental property, you can depreciate the building value (not land) over 27.5 years. For example, if the building is worth $240,000, you can deduct roughly $8,727 per year. Depreciation reduces your taxable rental income and can create a paper loss on your tax return. Ask Patrick about depreciation when you rent your home.
Calculating Depreciation
The math is simple once you set the basis right: depreciate the building value, never the land, over 27.5 years with straight-line depreciation, using the lower of fair market value at conversion or your adjusted cost basis minus land. In the page's example, a $300,000 home with a $60,000 land value gives you a $240,000 depreciable basis and roughly $8,727 in yearly deductions. Get that opening number right and the rest is arithmetic.
The IRS allows you to depreciate residential rental property over 27.5 years using straight-line depreciation. Your basis for depreciation is the lower of the fair market value at conversion or your adjusted cost basis, minus the land value. A property bought for $300,000 with $60,000 land value gives you a $240,000 depreciable basis: $240,000 divided by 27.5 equals $8,727 per year.
Building Value vs Land Value
The biggest mistake new rental owners make is depreciating the dirt. Land never depreciates, so you split the purchase price between building and land using the county appraisal ratio or a professional appraisal, and only the building side goes on the 27.5-year clock. If the Bexar Appraisal District says 80 percent building and 20 percent land, apply those percentages to your cost basis and leave the land alone.
Land cannot be depreciated. You must allocate the purchase price between building and land based on the county appraisal ratio or a professional appraisal. If the Bexar Appraisal District values your property at 80% building and 20% land, apply those percentages to your cost basis.
Depreciation Recapture When You Sell
The tax break is real, and so is the bill at the end: when you sell, the IRS recaptures depreciation at a flat 25 percent rate, on the depreciation you took or could have taken, regardless of your bracket. Plan for it when you estimate your net proceeds, and know that a 1031 exchange can defer it. Depreciation is generous while you hold the rental and collected when you sell, so run the exit numbers on day one, not at the closing table.
When you sell a rental property, the IRS recaptures depreciation at a flat 25% rate, regardless of your tax bracket. This applies to the depreciation you took (or could have taken). Plan for this tax bill when calculating your net proceeds. A 1031 exchange can defer depreciation recapture.
Ask Patrick about rental depreciation
Get a straight answer on depreciation, cost basis, and taxes when you convert to a rental.
