Moving out of a house and renting it instead of selling it is one of the most common ways people become landlords. It is also the situation where the first number in the depreciation math is most often wrong. Owners assume the study starts from what they paid, or from what the house is worth now. Neither is quite right, and the difference is usually tens of thousands of dollars of basis.
Which number becomes your depreciable basis?
When a personal residence converts to business use, the basis you depreciate is the lesser of two figures, measured on the date the property is placed in service as a rental: your adjusted basis in the home, or its fair market value that day.
Adjusted basis is roughly what you paid, plus capital improvements you made along the way, minus anything that reduced basis. A new roof, a kitchen remodel, an addition, a finished basement all add to it. Repainting a bedroom does not. Fair market value is what the house would sell for on the conversion date, supported by an appraisal or a defensible broker opinion, not a website estimate.
Take the lower of the two and you have the starting number. Everything else, the land split, the reclassification a study performs, the deduction that eventually lands on your return, is a slice of that figure.
Why the lesser-of rule usually costs appreciating owners.
Run the two numbers on a house bought several years ago and held through a strong market, and adjusted basis is almost always the smaller one. That is the point of the rule: the appreciation that happened while the house was your home is not depreciable. You do not get to bring a $470,000 valuation onto a Schedule E when your basis in the property is $365,000.
It cuts the other way in a falling market. If the house is worth less on the conversion date than your adjusted basis, fair market value becomes the ceiling, and the decline in value is simply lost for depreciation purposes. Either way the answer is the same: document both numbers, on the conversion date, while the evidence is still easy to get. An appraisal ordered two years later is a much weaker record than one ordered the month you listed the place for rent.
How does land come out of the number?
Land is never depreciable, so the next step is splitting the basis between land and improvements. On a converted residence the allocation follows the same logic as any purchase, and the source you use matters, assessor ratios, appraisal allocations, and closing documents can produce meaningfully different splits. We walk through the options in our note on land value allocation. What is left after land comes out is the depreciable basis a cost segregation study actually works with.
Does 100% bonus depreciation apply to a converted home?
Usually not, and this is where converted properties differ sharply from purchases. The restored 100% bonus depreciation applies to property acquired (contract signed) after January 19, 2025. Converting a home you already own to rental use is not an acquisition; your acquisition date is the day you signed the contract to buy the house, which for most converted residences is years in the past.
That does not make a study pointless, it changes what the study buys you. The components a study identifies still move out of the 27.5-year bucket into 5-, 7-, and 15-year classes, and those classes depreciate on accelerated schedules that front-load deductions heavily in the early years. You trade a single enormous first-year write-off for a much steeper curve over the first five. Confirm your contract date with your CPA before assuming either outcome, because it is the date that settles it.
A worked example: a home converted at $365,000 of basis.
Say you bought the house in 2019 for $325,000 and put $40,000 into a kitchen and bath over the years, giving you an adjusted basis of $365,000. It appraises at $470,000 on the day it becomes a rental in 2026. The lesser-of rule fixes your basis at $365,000, not $470,000.
Allocate 20% to land and $292,000 of depreciable basis remains. A typical residential study reclassifies roughly 22% of that, about $64,200, into 5-, 7-, and 15-year property: flooring, cabinetry, appliance-dedicated wiring and plumbing, driveway, fencing, landscaping. Because the home was acquired in 2019, no 100% bonus applies, so the comparison is between depreciation schedules.
Left alone, that $64,200 would generate roughly $2,300 a year of straight-line deduction. On accelerated schedules it produces on the order of $9,300 in the first full year, and about $47,000 across the first five years against roughly $11,000 without the study. Call it $36,000 of additional deductions pulled into that five-year window, worth in the neighborhood of $11,500 in federal tax at a 32% marginal rate, before any state effect. Whether you can use the loss in the year it lands depends on your facts, passive activity limits, material participation, real estate professional status, but deductions you cannot use are carried forward, not forfeited.
When should you make the call?
Before the return for the conversion year is filed, and ideally before the year closes. A study informs how the depreciation schedule is set up the first time, which is far cleaner than revisiting a schedule already on a filed return, and prior-year depreciation questions belong with your CPA rather than with us. If the house became a rental sometime in 2026, that return is the one being prepared next spring, and the documentation you want, the conversion-date appraisal above all, is easiest to assemble now. The broader timing question is covered in our piece on converting a primary residence.
If you are somewhere in this situation, run your numbers on the savings estimate first. It takes about two minutes and it uses your basis, not a guess. There are converted properties where a study does not pencil out, and we will tell you so.