Home converted to rental

[ajensen]

Primary home lived in it for two years (2012) - Home converted to rental property in 2014.  Under audit, Need help with supporting educ on 168 reg, Auditor claims to use the purchase price in 2012 as opposed to FMV in 2014 which is higher.  Auditor claims because reg 168 states to use the lesser of the two?  He is new in the field and want to make sure I am correct to use the FMV before he takes taxpayer to the cleaners denying so many other deductions.   Auditor also denying expenses from the property management report claiming he does not see the actual payment made to the property management?  He is indeed a difficult auditor.  Help anyone!  thank you

[Just-Lisa-Now-]

For depreciation, you use the purchase price or FMV, whichever is lower at the time it becomes a rental.

[Just-Lisa-Now-]

as far as the property management fees go...are you sure they used the gross rents then deducted the prop mgmnt fees, or did they just use the net amount of rents after the property management company took their cut then tried to claim the fees again?

[Norman2001]

With regard to the depreciation, the auditor and Lisa are correct; use the lesser of the two.  If the regulations aren't clear to you, look at Pub 946, page 12, Property changed from personal use. 

A few other points:

The land isn't depreciable, so it's value is removed from the depreciable amount of the property. 

Second, if any improvements were made to the property after purchase and before it was put into service the costs would be added to the basis.  And of course any improvements while in service are also added to the basis.