What cost basis is used during a sale in this situation?

[Jon K.]

Let me preface this by saying I have already emailed the same question to my tax guy, but wanted to ask here as well. I am considering selling one of my rentals to the current tenants. This property used to be my primary residence. I purchased it for 150k. When I converted it to a rental I believe the fair market value and amount they used on my taxes was 110k. I operated at a small loss for years but when you add depreciation I'm sitting on 35k of deferred losses on paper (my W2 income was too high to claim the losses). If I sell this property to them at the hypothetical value of 125k, what would the tax implications be?

I'm unclear as to whether the original purchase price or the value at the time it became a rental is considered when looking at gains/losses.

[Eamonn McElroy]

@Ashish Acharya

My understanding is that OP has neither gain nor loss on the sale.

Original purchase is used to calculate gain.  No gain is calculated when using OC.

FMV at time of conversion is used to calculate loss. No loss is calculated when using FMV.

Taxpayer is free and clear. You're using FMV to calculate gain (shouldn't be doing this -- it's only used to calculate loss).