How to depreciate a home you converted to a rental

The rule in one paragraph

Publication 527 says that when you change property you held for personal use to rental use, for example when you rent your former home, the basis for depreciation is the lesser of the fair market value or the adjusted basis on the date of the conversion. You treat the property as placed in service on that date and use the depreciation system in effect then, which for any conversion after 1986 is generally MACRS. For a residential rental that means 27.5 years with the mid-month convention.

Two things follow. First, you cannot go back and depreciate the years you lived there, because personal use is not depreciable. Second, you will usually be comparing two numbers, one from your records and one from the market, and the smaller one wins.

Step by step

1. Find your adjusted basis on the conversion date. Start with your original cost, add the cost of permanent additions and improvements since you acquired it, and subtract decreases such as casualty or theft losses you claimed earlier. Publication 527 chapter 2 (Adjusted Basis) lists the increases and decreases.
2. Find the fair market value on the conversion date. Publication 527 defines it as the price at which the property would change hands between a willing buyer and a willing seller, both with reasonable knowledge of the facts. Sales of similar property on or about that date can help. The IRS does not name a required method, so write down how you got the number on the day you convert and keep the support (an appraisal, a broker's opinion or the sales you used).
3. Split each number between land and building, because land is never depreciated. See how to split the price between land and building.
4. Compare the building portions. The smaller of the fair market value of the building and the adjusted basis of the building is your depreciable basis.
5. Pick the month you placed it in service, which is the date it was ready and available for rent, and read the year 1 percentage from Table 2-2d of Publication 527. Later years use the same row.

Placed in service means ready and available for rent, even if the first tenant moves in later.

A worked example

Example a made-up owner bought a house and lot for $250,000, of which $200,000 was the house and $50,000 the lot. Years later the owner added a $30,000 kitchen and addition, so the house's adjusted basis is $230,000 ($200,000 plus $30,000) and the lot's is $50,000. On August 1 the house is ready for rent. It is worth $260,000 at that point, of which $55,000 is land and $205,000 is the house. The house's fair market value ($205,000) is lower than its adjusted basis ($230,000), so the depreciable basis is $205,000.

Example continuing the same house. Table 2-2d gives 1.364% for a house placed in service in August, so year 1 depreciation is $205,000 times 0.01364, which is $2,796. In each full year after that the residential percentage is 3.636%, so the deduction is $205,000 times 0.03636, which is about $7,454. The $55,000 of land is never depreciated.

Publication 527 works the same kind of problem. In its example a house had an adjusted basis of $164,000 and a fair market value of $147,000 at conversion (land excluded), so the $147,000 is used. With an August start, year 1 is $147,000 times 1.364%, or $2,005.

Other things that change on the conversion date

If you convert at any time other than the first day of your tax year, you split the yearly expenses between personal and rental use. Publication 527 gives the example of an owner who moved out in May and started renting on June 1: that owner deducts seven-twelfths of yearly expenses such as taxes and insurance, and from June on the monthly bills such as utilities.

The personal months are not lost. Publication 527 says you can still include the home mortgage interest and real estate taxes for the part of the year the property was personal when you figure your Schedule A deduction. Depreciation and insurance are not allowed for the personal months.

Fixing up the house before the first tenant is a separate question. Repairs made before a rental is placed in service are often capital costs, and the line between repair and improvement matters more than usual.

Why this matters when you sell

Depreciation you claim, or could have claimed, lowers your basis in the property. Gain from depreciation after May 6, 1997 cannot be excluded under the home sale rules, and the sale rules are the reason many owners ask about this at all. See selling a former home that you rented out. If you have been missing depreciation for years, read what to do when you forgot to depreciate.

How DoorKeeping handles it

Each property has its own books in DoorKeeping, and you can keep the building, the land and each improvement as separate accounts, with the conversion-date value and your support attached as a document. Depreciation expense maps to Schedule E line 18. DoorKeeping does not calculate your basis or give tax advice, so have your tax preparer confirm the conversion-date figures. The software costs $2 per unit per month with no other fees.

Sources

1. IRS, Publication 527, Residential Rental Property (2025): Property Changed to Rental Use; Basis of Property Changed to Rental Use, read Oct 30, 2026
2. IRS, Publication 551, Basis of Assets: Land and Buildings, read Oct 30, 2026
3. IRS, Publication 946, How To Depreciate Property, read Oct 30, 2026

Questions

Can I depreciate the years I lived in the house?

No. Personal use is not depreciable. Depreciation starts on the date you change the property to rental use, which is when it is ready and available for rent.

Do I use what I paid or what it is worth now?

Whichever is lower. Publication 527 says the basis for depreciation is the lesser of the fair market value or your adjusted basis on the conversion date.

Do I need an appraisal?

The IRS publication does not require one, but it expects a fair market value you can support. An appraisal or similar sales evidence from the conversion date is the kind of record people keep.