“ What do I need to declare on the Cost Basis? The Fair Market Value at the time we started renting the room is about 4 times the original purchase price, and the square footage of the house if much bigger as well. Should I use the FMV for the Cost Basis since the IRS expects you to depreciate the percentage used as "rental" or do I have to use the original purchase price (which I can't even remember the exact figure of now)?”---->Basically, as you know, the cost basis of your rental property is just the improvement, not the land. I guess you need to estimate the value of your land and subtract that from the total FMV of the property. Land can NEVER be depreciated. You need to determine your cost basis( for tax purposes) to determine how much depreciation you can claim on the rental property. So, the tax basis of the rental property is the lower of the Fair Market Value (you can get this value from an appraiser though each appraiser gives you different estimated FMV) of the property on the date of the change in use or the adjusted basis of the property. For instance, FMV is $400,000 and adjusted value of the rental property is $370,000(20% for rental use), then your basis for deprecation is $370,000 and you deprecate it for 27.5 years; So, assume that you begin to depreciate the property on Jan 1, 2011, then you can annually depreciate $2,691 per year; $370,000*0.2/27.5=$2,691. The adjusted basis above is the original cost of the building, excluding the value of the land, plus permanent improvements increasing the value of property, adds to its life and other capital costs(i.e., replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling; you can never deduct the costs but add the costs to your property. You can deduct your repair costs in the year incurred, so you must carefully distinguish between repairs and improvements.) , and minus items that represents a return of your cost, such as casualty or theft loss deductions claimed on prior tax returns. The basis of real property also includes fees and charges you pay in addition to the purchase price. These generally are shown on your settlement statement and include the costs, i.e., legal and recording fees , abstract fees , survey charges or etc. Also if you convert property from personal use to business use, you may depreciate even Furniture, Appliances, Equipment, i.e., refrigerator ; for instance, you buy a new refrigerator for rental use for $1,000 then 20% of the cost, $200, can be depreciated for the next seven years, I guess, under the MACRS rule. This means that you can deduct the refrigerator $29 in the first year; 14.29%*$200=$29.Also keep this in mind; as you receive rental income from the rental of the dwelling unit, you may deduct certain rental expenses on your tax return. These tax deductible rental expenses reduce the amount of rental income that you pay tax on. If your rental expenses exceed your rental income, then you may report a loss of up to $25,000 on your tax return( if you ACTIVELY participate the rental business, I guess), limited for adjusted gross incomes above a certain higher level. Since you also use the dwelling unit as a home, or rent it at less than fair rental value, certain restrictions apply to the tax deduction of your rental expenses on your tax return. Also a special 25% tax rate applies to your rental property( whenyou dispose of it)to real property gains attributable to depreciation previously taken and not already recaptured under either section 1245 or 1250 rules. Any remaining gain attributable to unrecaptured depreciation previously taken, including S/L depr, is taxed at 25%( as long as your marginal tax rate is higher than 15%) rather than long term capital gain rate of 10% or 20% in 2011.