Property Changed to Rental Use

If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use.

You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes.

You can’t deduct depreciation or insurance for the part of the year the property was held for personal use. However, you can include the home mortgage interest and real estate tax expenses for the part of the year the property was held for personal use when figuring the amount you can deduct on Schedule A.

Example. Your tax year is the calendar year. You moved from your home in May and started renting it out on June 1. You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance.

22 Chapter 4 Special Situations Publication 527 (2025)

Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities.

When figuring depreciation, treat the property as placed in service on June 1.

Basis of Property Changed to Rental Use

When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of the FMV or adjusted basis on the date of conversion.

FMV. This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the FMV of the property.

Figuring the basis. The basis for depreciation is the lesser of:

• The FMV of the property on the date you changed it to rental use; or

• Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years’ income tax returns and other decreases to basis. For other increases and decreases to basis, see Adjusted Basis in chapter 2.

Example. You originally built a house for $140,000 on a lot that cost you $14,000, which you used as your home for many years. Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. Part of the improvements qualified for a $500 residential energy credit, which you claimed on a prior-year tax return. Because land isn’t depreciable, you can only include the cost of the house when figuring the basis for depreciation.

The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500).

On the date of the change in use, your property had an FMV of $168,000, of which $21,000 was for the land and $147,000 was for the house.

The basis for depreciation on the house is the FMV on the date of the change ($147,000) because it is less than your adjusted basis ($164,000).

Cooperatives

If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. (Depreciation methods are discussed in chapter 2 of this publication and Pub. 946.) The basis of all the depreciable

real property owned by the cooperative housing corporation is the smaller of the following amounts.

• The FMV of the property on the date you change your apartment to rental use. This is considered to be the same as the corporation’s adjusted basis minus straight line depreciation, unless this value is unrealistic.

• The corporation’s adjusted basis in the property on that date. Don’t subtract depreciation when figuring the corporation’s adjusted basis.

If you bought the stock after its first offering, the corporation’s adjusted basis in the property is the amount figured in (1) under Depreciation , earlier. The FMV of the property is considered to be the same as the corporation’s adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic.

Figuring the Depreciation Deduction

To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. Generally, that will be MACRS for any conversion after 1986. Treat the property as placed in service on the conversion date.

Example. Your converted residence (see the previous example under Figuring the basis, earlier) was available for rent on August 1. Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1.364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × 1.364% (0.01364)).