When you convert your primary residence into a rental property, the property is reclassified as an income-generating asset from a tax perspective, allowing you to begin depreciating it for tax purposes. This change unlocks a powerful way to offset rental income with depreciation deductions, which were not available while the property was used solely for personal purposes.
The depreciation is calculated based on the lesser of your adjusted basis (typically your purchase price plus improvements) or the fair market value (FMV) of the property at the time of conversion. This moment is also an ideal time to consider a Cost Segregation study. By analyzing the components of your converted home, ETS can identify assets like the flooring, appliances, and landscaping that qualify for shorter depreciation periods, boosting your cash flow as a new landlord with accelerated deductions.
Primary Residence to Rental: Tax Key Facts
- Classification Change: The property is reclassified as an income-generating asset from a tax perspective.
- New Deduction: You can now begin depreciating the property for tax purposes.
- Depreciation Basis: Calculated based on the lesser of your adjusted basis or the fair market value (FMV) at the time of conversion.
- Cost Segregation Timing: The conversion is a great time to consider a Cost Segregation study to identify assets for shorter depreciation periods.
- Study Benefit: The study can help offset rental income with accelerated deductions, boosting your cash flow as a landlord.
