Clear Money Guide
What this guide covers
A quick view of the questions and evidence developed below.
Updated August 3, 2026. Quick answer: when you move out and rent your home instead of selling it, your basis for depreciation is the lesser of what you paid or what it is worth on the day you convert it. If the house has fallen in value, you permanently lose the difference — and the day you convert is the day it is fixed.
The rule, in the IRS’s own words
If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its FMV when you change it to rental use.
— IRS Pub. 527, ch. 4, ‘Property Changed to Rental Use’ / ‘Basis of Property Changed to Rental Use’; IRS Pub. 551, ‘Property Changed to Business or Rental Use’
Lesser of is doing all the work in that sentence. If you paid $400,000 and the house is worth $330,000 when you convert it, you depreciate from $330,000. The $70,000 of decline is not deductible, not depreciable, and does not come back.
Gain and loss are measured differently, which is the part that surprises people
The FMV ceiling applies to depreciation and to computing a loss on a later sale. For computing a gain, the ordinary adjusted basis applies without that ceiling. The practical effect is that a converted residence can be sold at a price that produces neither a deductible loss nor a taxable gain — falling between the two measures.
What we could not confirm. The lesser-of-adjusted-basis-or-FMV sentence for depreciation was returned identically, verbatim, across two independent fetches of Pub. 527, so it is treated as reliably verbatim. A separate fetch of Pub. 551 stated in summarized (non-verbatim) form that gain is figured using unrestricted adjusted basis while loss uses the FMV-capped basis, matching well-known IRS guidance, but we could not obtain a verbatim IRS sentence making that gain/loss distinction. Treat the gain/loss split as directionally correct but not verbatim-confirmed this session.
Why the timing of the conversion matters so much
Because the measurement happens once, on the conversion date, and cannot be revisited. Two consequences follow:
- Get a defensible valuation on the day you convert. A formal appraisal is the cheapest part of this decision and the only part you cannot reconstruct later.
- Converting a home that has fallen in value locks in the fall. If you are considering selling at a loss versus renting it out, understand that renting it forfeits the decline for tax purposes.
The other clock you are starting
Renting out a former home also begins accumulating depreciation — which you must subtract from basis whether or not you claim it, and which becomes recapture when you sell. Converting is not a neutral holding pattern. It starts a tax position that gets harder to unwind each year.
Going the other direction is not the mirror image of this decision.
Going the other direction — a rental you move into — is a different set of rules entirely: converting a rental to your primary residence is its own decision and is not the mirror image of this one.
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Related: sell or keep · the recapture you are building.
General information drawn from the Internal Revenue Code, IRS regulations and IRS publications, not legal, tax or financial advice. Federal tax rules change and every figure here is year-labelled with its source named. Landlord-tenant law, transfer taxes and property law are STATE law and differ materially between states; nothing here states the rule for your state. Depreciation, basis and recapture outcomes depend on your own records and prior returns, which we cannot see. We are not a law firm, a tax adviser or a real-estate broker.
Becoming a landlord means the deposit statute now applies to you, and the deadlines are shorter than most new landlords expect — what your state requires, quoted from the code.