How to value property moving from primary residence to rental

How should we value a property that was our primary residence for several years that we recently let out, for IRS purposes.

I understand that US taxes on rental income are very different, based around compulsary writing off depreciation of the property value. But how to determine this value?
Should we use the original purchase price of 6 years ago, applying the required depreciation to that value from the start of our ownership? (ie the depreceiation has been ongoing, but obviosly only featuring in our taxes now we are renting).
Or does it need to be a formal valuation from a surveyer at the point of change of use from primary residence to rental income? Can these be backdated to a particular point in time, or is a "best guess" based on Zoopla or other websites OK?
In this case it is particularly difficult has the flat has flammable cladding and so hasn't been able to receive a formal valuation since October 2019.

But the main question is on transition from primary residence to rental should we try to determine the market value of the property at that time, or use the original purchase price with depreciation applied? I actually find it quite confusing so I have no idea which would work in my favor.

Sounds like you have a bit of Googling to do, but it makes sense to me that it should be the market value at the time it went from primary home to rental property. The higher the starting value the more advantageous it is since it will reduce taxable income when deducted from the rent. Google will also reveal what period the depreciation is over. (20 years?) Zoopla will give a good estimate of the current value of the house.

If you include any carpets, furnishings and fittings they can also be depreciated, but over a much smaller time frame. I expect they should also be valued at the start of the house becoming a rental.

Thanks. I'm also bearing in mind capital gains in the event of an eventual sale. It's not clear to me that a higher valuation at this point is better - because a higher value means a higher per year compulsary depreciation (which will I think exceed our rental income) so lead to increased capital gains on sale.

I found this:

When a personal residence is converted to rental property, you need to know the basis for depreciation purposes. This is the lower of your adjusted basis in the residence at the date of conversion (purchase price plus qualified capital improvements), or the fair market value of the property at the time of conversion. In general, you must depreciate your residential rental property over a 27.5-year period.

https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/09/17/tax-implications-for-converting-a-primary-residence-to-rental-property

so looks like we don't need to get a valuation (use purchase price). The problem is then the gain in value while its been our primary residence will be baked into any future capital gains (never mind the extra capital gains from the compulsary depreciation). But maybe that is considered on the capital gains side (ie prorated or some other way taking into account value at the change of use?)

Thanks. I'm also bearing in mind capital gains in the event of an eventual sale. It's not clear to me that a higher valuation at this point is better - because a higher value means a higher per year compulsary depreciation (which will I think exceed our rental income) so lead to increased capital gains on sale.

I found this:https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/09/17/tax-implications-for-converting-a-primary-residence-to-rental-property

so looks like we don't need to get a valuation (use purchase price). The problem is then the gain in value while its been our primary residence will be baked into any future capital gains (never mind the extra capital gains from the compulsary depreciation). But maybe that is considered on the capital gains side (ie prorated or some other way taking into account value at the change of use?)

27.5 years?  I certainly would never have guessed that

I don’t think depreciation comes into the capital calculation when you come to sell, which I think will be sales price minus original purchase price plus all capital improvements. House maintenance is not a factor in capital gains calculation and I think depreciation is allowed since you will be expected to make repairs. Need a new roof? That money should come from the depreciation money set aside for repairs, and a new roof is not a capital improvement so doesn’t affect the capital gain calculation.

My understanding was that the compulsary depreciation that you must put on every return as a rental would offset any rental income, but on sale it would be that depreciated basis that would be used to evaluate capital gains. So you are moving income tax on the rent into capital gains tax on the sale. And there is no way around this because the depreciation is compulsary.

In the case where you had a property that didn't change value and you sold for the same price you bought for after renting for 27.5 years you would have capital gains due on the entire sale price (as the depreciated value would be 0).

My understanding was that the compulsary depreciation that you must put on every return as a rental would offset any rental income, but on sale it would be that depreciated basis that would be used to evaluate capital gains. So you are moving income tax on the rent into capital gains tax on the sale. And there is no way around this because the depreciation is compulsary.

In the case where you had a property that didn't change value and you sold for the same price you bought for after renting for 27.5 years you would have capital gains due on the entire sale price (as the depreciated value would be 0).

Sounds reasonable, I think. Income tax is usually higher than capital gains tax so that would sound like it works in your favor., particularly since the basis will be calculated on the price today  minus the depreciation by the time you sell it.  That all depends on the initial purchase price. If I bought a house for $50k and it is now $100k then the unrealized gain is $50k but if I then started to rent it out and sold after 9 years then it’s depreciated value is approx $70k so the cap gain would only be $30k.

You have a complicated situation here because there are other considerations including:

1. Tax in the UK on rental income - there are not the same expense deductibility rules from HMRC as there are from the IRS - i.e mortgage interest (finance costs)  are being phased out : https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

2. Exchange rate movements during the period of rental and on disposal - your sale value can be much higher (or lower) in dollar terms - remember you'll be selling your flat in pounds sterling.

Some people consider putting their rental property into a limited company in the UK because the tax rules are different - although from a US perspective that brings about filing forms 5471.

All in all, it's quite complex and I would recommend getting specialist tax advice from someone who understands both the UK & US perspective.

Thanks - I'm aware of the UK tax situation. There is 20% relief on interest payments (the phasing is now complete). My understanding was that even though it is taxed as income in the UK the FTCs from this will be in the "passive basket" so can be saved up for 10 years and used to offset US capital gains.

Exchange rate movements are a problem but would be the same whether primary residence or not?

I don't think a limited company is an option for us because of the complexity but also because of the cladding problems the flats are not easily transactable at the moment (conveyancing is likely to fail).

I didn't respond to this thread earlier, 'cos I didn't have anything to add. Then I remembered something from an old tax return. However, this is from 2003 so things may have changed significantly since then:

When KPMG did my taxes for me in 2003 (part of the relocation package), the value for deprecation was was the value of the house and not the land it was built on (this was a normal urban semi-detached with garden). After all, land doesn't wear out :-). I'd bought the house only a year before (relocation was a surprise), and the homebuyers survey and valuation report said reinstatement cost (i.e. what it would cost to build the property from scratch) was £x (about 60% of the purchase price), so KPMG selected and used the £X as the value to depreciate. IIRC, they got to pick between the exchange rate from the date of purchase and the exchange rate from the date of service (when it was first rented out).