The direct answer
Rental-property cost basis begins with the applicable acquisition or conversion basis and is then adjusted for capital improvements, depreciation and other required items. Purchase price alone is often not the final tax basis, and converting a personal residence to rental use can trigger special depreciation-basis rules.
Build acquisition basis from supported costs
Publication 551 explains that basis generally begins with cost and can include certain acquisition costs. Allocate land and depreciable improvements and retain the closing statement and supporting records.
To apply the approach to an editable scenario, use the Rental Property Calculator. For the neighboring question, explore Home Appreciation Calculator.
Add qualifying capital improvements
Improvements that increase value, restore the property or adapt it can increase basis. Keep invoices and placed-in-service records because these amounts can affect future depreciation and gain calculations.
Handle conversion to rental carefully
Publication 527 explains that when property is converted from personal to rental use, the basis used for depreciation can depend on adjusted basis and fair market value at conversion. The tax basis used for other purposes can involve additional rules.
Worked example
A property bought for $400,000 may have a tax basis different from $400,000 after allocating land, adding qualifying acquisition costs and later improvements, and subtracting depreciation adjustments over time.
Common mistakes and limitations
Do not use current market value as a substitute for historical adjusted basis except where a specific tax rule calls for fair market value in the calculation.
Scenario estimator based on user inputs. It is not an appraisal, lending decision, tax calculation or investment recommendation.
Frequently asked questions
Do capital improvements increase rental-property basis?
Generally, qualifying capital improvements can increase basis, subject to the applicable tax rules.
Is the depreciation basis always the original purchase price after converting a home to rental use?
No. Conversion rules can require comparison with fair market value and other basis adjustments.
Sources and further reading
The article’s examples are illustrative arithmetic. The references below provide context for operating, valuation or transaction concepts; they do not endorse the assumptions or the calculator.
- IRS — Publication 527 (2025), Residential Rental PropertyRental income and expense concepts; operating/rental expense context.
- IRS — Publication 551 (12/2025), Basis of AssetsFair-market-value concept and use of similar-property sales as evidence.
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