re8888 is about right.

you need to depreciate your rental property every year. you have to use the lesser of the fair market value of $800K or the adjusted basis for the house (the $400K purchase price + other purchase cost + any additions to the house if any) on the day you converted your residence to rental property in 2007. In your case, you have to use the latter, i.e. $400K +, not $800K for depreciation basis.

Thus, you do have gain when you sell it for $800K.

This also answers the question about how IRS knew the value. You need to depreciate your rental property.

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• Thanks! -RE8888- ♂ (8 bytes) () 02/03/2010 postreply 14:19:56