Turning Your Home into a Rental: How Depreciation Works After Conversion (Including New Bonus Depreciation Rules)

Based on IRS Code §§168, 167, Reg. §1.168(i)-4, and OBBA bonus depreciation changes 

If you convert a primary residence into a rental property, the IRS treats that property very differently once it becomes an income-producing asset. Depreciation begins, cost segregation becomes possible, and bonus depreciation may apply but only if very specific rules are met. 

Here’s what every investor needs to know before turning their home into a rental. 

1. How the IRS Determines Your Depreciation Basis After Conversion

Depreciation doesn’t start when you boughtthe home.
It starts when you convertit to a rental. 

The IRS sets the basis for depreciation at the lower of:

1. A) The property’s adjusted basis (what you paid + improvements − casualty losses), or
2. B) The fair market value (FMV) on the date you convert it

Authority:IRC §168(i)(5), Reg. §1.168(i)-4(b) 

This rule exists because you can’t depreciate a loss that occurred while it was your personal residence. 

Example: 

• Original purchase price (excl. land): $300,000 
• Improvements made over time: $50,000 
• Adjusted basis: $350,000 
• FMV at conversion: $320,000 

Your depreciable basis is $320,000, not $350,000. 

This basis is what determines: 

• Your annual straight-line depreciation 
• Your cost segregation reclassifications 
• Your bonus-eligible amounts 

2. How Cost Segregation Applies After Conversion

Cost segregation is allowed on any income-producing property, including a property that used to be your home. 

But it applies only from the date of conversion forward. 

This means: 

• You cannot depreciate or “bonus” personal-use years 
• Only the remaining basisis eligible for reclassification 
• You use an engineering-based allocation of components as of the conversion date

The IRS requires that cost basis be restated as though the building were newly placed in service as rental property. 

3. How Bonus Depreciation Applies Under the NEW 100% Bonus Rules

This part is where OBBA changes things significantly. 

Under the One Big Beautiful Bill: 

100% bonus depreciation applies only to assets BOTH: 

1. Purchased after January 19, 2025, AND 
2. Placed in service after January 19, 2025 

Converted properties do not qualifyfor 100% bonus on existing components because: 

• The building was originally purchased before 1/19/25 
• You're not buying new assets you’re reclassifying old ones 

So what canqualify for bonus? 

Only new improvements made after conversion, such as: 

• New flooring 
• Renovations 
• Appliances 
• HVAC units 
• Landscaping 
• Roof replacements (post-TCJA rules apply) 

These improvements: 

• Are treated as newly placed in service
• And if placed in service after 1/19/25, may qualify for 100% bonus
• Assuming they meet the §168(k) property requirements 

Cost Seg components from the original structure 

→ NOT bonus eligible under OBBA
because they were purchased beforethe required date. 

4. Example: Applying All These Rules Together

Scenario: 

• You bought your home in 2018 for $500,000
• Land value: $150,000
• Building basis: $350,000
• FMV at conversion in 2025: $700,000
• Improvement basis after conversion: $50,000 

Step 1: Determine depreciable basis 

Lower of adjusted basis ($350k) or FMV ($700k)
→ Depreciable basis: $350,000 

Step 2: Perform cost segregation 

A typical home yields ~20–25% reclassification to 5-, 7-, and 15-year property.
But under OBBA… 

Step 3: Bonus depreciation eligibility 

Reclassified components from the original home:
❌NOT eligible for bonus
Because they were originally purchased before 1/19/25. 

Post-conversion improvements:
$50,000 improvement done in March 2025
→ ✔️Bonus eligible at 100% 

Result: 

• Straight-line depreciation on the base $350,000 
• Accelerated MACRS on the short-life components 
• Bonus only on the new improvements

Key Takeaways:

• Every Investor Should Understand
• Depreciation basis resets at conversion

Using the lower of adjusted basis or FMV.

• Cost segregation is allowed

But only on the basis attributable to rental use. 

• 100% bonus DOES NOT apply to existing components for converted homes

Unless the purchase AND placed-in-service dates are after 1/19/25. 

• Improvements made after conversion DO qualify for bonus

If placed in service after January 19, 2025. 

5. Your CPA MUST calculate conversion basis correctly

This ensures your cost segregation numbers are valid and defensible. 

6. Want a Precise Answer for Your Property?

Engineered Tax Services specializes in: 

• Mixed-use depreciation 
• Conversion scenarios 
• Bonus depreciation optimization 
• Cost segregation for both new and converted properties 

We offer a complimentary, conservative benefit analysisso you can see exactly what your tax savings would be before beginning a study. 

Click here to request yours.