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I agree with Phil about getting help.

My gut feeling looking at this example (granted it is missing some facts) is there will be no loss and possible gain due to depreciation.

When you convert a home to a rental property where the FMV is less than your cost basis at the time conversion, ONLY the decrease in FMV since the conversion would be deductible.

In this example, you would have had to sold it for less than $110,000 and only that difference would be deductible.

Assuming the land was worth zero to keep it easy. He paid a $150,000 for the house. The FMV at the time of conversion was $110,000. So that $40,000 loss would be nondeductible personal loss.

So if you sell it for anything more than $110,000, there would not be a deductible loss.

If you sell it for less than $110,000, you will have a situation for a deductible loss for the difference between the selling price and $110,000.

I'm not sure any tax estimator can really handle this situation with mixed use.
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