If a home is converted to business or rental use, the taxpayer can depreciate the part of the home that is used to produce income and claim a loss when the home is sold. The basis for depreciation and for calculating the loss is the lower of the home’s basis or fair market value when it is converted to business use.
The parents reduced their taxable income by $5,000 by depreciating the part of their home that was used to produce income. Since the parents income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%).
If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by depreciating the part of your home that is used to produce income.