Residential real estate prices are climbing in many areas, and rental rates are strong.

To take advantage of this favorable situation, you might be thinking about buying a new residence and converting your existing place into a rental property that you can sell later for a higher price. Good idea!

Of course, converting a personal residence into a rental has important tax implications. Here’s what you need to know.

Tax Basis of Property Converted to Rental Use

The first question that arises when you convert a personal residence into a rental is how to determine the property’s tax basis for depreciation purposes during the rental period and for gain/loss purposes when you eventually sell.

Weirdly enough, two different basis rules apply.

Tax Basis for Depreciation and Loss on Sale Purposes Is Determined under Special Unfavorable Rule

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