Surendra’s personal residence originally cost $340,000 (ignore land). After living in the house for five years, he converts it to rental property. At the date of conversion, the fair market value of the house is $320,000. As to the rental property, calculate Surendra’s basis for:. a. Loss.
b. Depreciation.
c. Gain.
d. Could Surendra have obtained better tax results if he had sold his personal residence for $320,000 to hold as rental property?

a. Loss

The basis for Loss is the lower of the basis after it is adjusted for its new purpose or the fair market value.

Adjusted = $340,000

Fair market value = $320,000

Loss basis will therefore be the lower value of $320,000

b. Depreciation:

This is the same as the loss basis because the residence was converted from personal use to business use.

= $320,000

c. Gain

= Adjusted basis of the property

= $340,000

d. No.

Because he would be converting to rental property which is a business use, the loss that he would have incurred of $20,000 would have been disallowed and he wouldn't be able to deduct it.

Loss = Cost - fair value = 340,000 - 320,000 = $20,000

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