A home is purchased as a primary residence in 1984. The owwner lives in th ehome for 10 years. In 1994, the owner changes the purpose of the home to a rental investment property. For tax purposes, when he sells the home can he use the value of the home at the time it was changed to an investment property in 1994 as the cost basis? Or must he use the original purchase price when he purchased the home as his primary residence in 1984?

ANSWER

Expert Thomas Graham iii's Answer:

The seller will need to do a quick calculation to get to his/her adjusted cost basis in the property. The owner will start with the original purchase price back in 1984. The owner can add in any purchase costs, improvements, and selling costs. However, accumulated depreciation must be deducted to come to the adjusted cost basis. There is a good chance that the owner has been taking a yearly tax deduction related to depreciation and you can’t "double dip". (IRS Publication 544)

Thomas Graham iii, CPA, CFE

Oklahoma

7 yrs experience

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78 Ans.