J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

9.5 Depreciation on Converting a Home to Rental Property

When you convert your residence to rental property, you may depreciate the building. You figure depreciation on the lower of:

• Fair market value of the building at the time you convert it to rental property; or
• Adjusted basis. This is your original cost for the building, exclusive of land, plus permanent improvements and other capital costs, and minus items that represent a return of your cost, such as casualty or theft loss deductions claimed on prior tax returns.

You claim MACRS depreciation based on a 27½-year recovery period, which extends to 28 or 29 years due to the mid-month convention. The specific rate for the year of conversion is the rate for the month in which the property is ready for tenants. For example, you move out of your home in May and make some minor repairs. You advertise the house for rent in June. Depreciation starts in June because that is when the home is ready for rental, even if you do not actually obtain a tenant until a later month. Under a mid-month convention, the house is treated as placed in service during the middle of the month. This means that one-half of a full month’s depreciation is allowed for that month. In Table 9-1, the monthly depreciation rates for the year the property is placed in service and later years are shown. The table incorporates the mid-month convention.

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