Basis of an AirBNB with improvements BEFORE it was an AirBNB

Forum|Forum|1 day ago
September 16, 2026
3 replies
33 views

Hoping there is someone out there smarter than me in this area, becasue this is my first AirBNB business.

I have a client that bought a small home with acreage attached to it 2 years ago. The house was in sad shape - no real floor for example. They began to renovate it, then once they had it completed, they began to build their dream home on the acreage next to it, and completed the new home last year. They finally decided to turn the original home into an AirBNB.

So here is the nitty gritty. They purchased the home for $190 (deleting zeros for expediency). The improvements they added before they moved in and while they were living in it BEFORE they decided what they were going to do with it total $237. When they did an appraisal last year, the property appraised for $290, with the land being $35 of that value. Once they decided it would be an AirBNB, they also made improvements and purchases for which I’ve accounted for on the return. But what do I do with the improvements that are more than the value of the house. And some of these improvements would only be depreciated for 15 years ( if they were on a rental property) and some would be for the full 27.5 years.

I think I know, but again, my first AirBNB and I don’t want to do this wrong. I keep second guessing myself.

T

TaxGuyBill

The depreciable Basis is the LOWER of (a) Adjusted Basis or (b) Fair Market Value on the date of conversion.

The Adjusted Basis is generally the purchase price plus the cost of improvements (assuming no prior depreciation or casualty events).

Unless the property decreased in value, the depreciable Basis is usually the Adjusted Basis. However, you seem to be saying they bought it for $190 and did $237 of improvements, which is a total of $427. That seems a long ways off from the appraisal of $290, unless the appraisal was done before the improvements were made.

Once you have the total depreciable Basis, you can break the separate assets down as a Cost Segregation.

Assuming it is a short-term rental, the building is depreciated over 39 years.

If the average rental period is 7 days or less, AND they Materially Participate in the activity, it is NOT a Passive Activity, so if that applies, make sure you tell your software that.

G

Gwen4Author

Level 3

You’re right, the $427 is quite a ways off from the $290. As they started making the outside improvements on the outside of the house, I think they were already considering making it a rental of some kind so they chose nicer options because they wanted it to match their home which was being built adjacent to it. But as they chose the options for the interior, most RE pros would have chose more builder grade options, he went with higher end when the neighborhood they were in didn’t support those options. And those decisions were made BEFORE they decided to turn it to a rental. I just wasn’t sure it was ok to put those decisions into a seperate asset for the rental. Thank you for your quick response.

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Terry53029

Intuit Community Champion

Also don’t forget if they are going to provide substantial services (like a motel) it will be on 1040 schedule C. if only cleanup between clients put on 1040 schedule E (even though on a schedule E it will be nonpassive income, and be sure you tell your software it is nonpassive

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