Cost basis for second home turned rental

5 Replies

I purchased a property in 2008 for the purpose of having a 2nd home / vacation home specifically for our family's use (not rented).  As we found it more difficult to get to the house on a regular basis, we made the decision to convert it into a rental last year and brought in a tenant.  My question is in regards to how to establish the cost basis for the property.  I've read that for primary residence turned rental, your basis is the lesser of the cost paid for the property plus capital improvements or the fair market value of the property.  Does this same calculation apply to a 2nd home?

Thanks in advance for the help.

@Rob Myers  

Per the IRS:

"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 fair market value or adjusted basis on the date of conversion.

Fair market value. 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 fair market value of the property.

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

  • The fair market value 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." 

Hope that helps.

@Brandon Hall  are those the same rules for second homes turned rentals?  I seem to recall some additional twists in that case.

@Jon Holdman  converting a second property does have interesting tax implications and rules, but I want to say that the cost basis is treated as stated in the IRS rules I mentioned. I haven't had a situation like this yet so I'm not 100% sure. 

I'm going to keep researching and I'll post back here if I find anything different. And let me know if you find anything different as well, now I'm curious. 

@Brandon Hall  

Thanks for looking into this.  I would be curious if you find any other tax implications.

Is it usually required to obtain an appraisal to determine fair-market value? How often is this challenged if there has been a reasonable estimate?

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