Converting Your San Antonio Home to a Rental: Homestead, Basis, and the Tax Moves to Make Before the First Tenant

Converting a San Antonio home from your primary residence into a rental is a tax event, even though no money changes hands. The day you stop living there and start renting it out, three things flip at once: your homestead exemption with BCAD becomes invalid, your cost basis for depreciation gets locked in, and your deductible expenses move from Schedule A to Schedule E. Handle these in the right order and you keep thousands in deductions. Handle them wrong and you either overpay taxes for years or trigger a BCAD back-assessment with penalties.

This is a landlord-side playbook for the mechanical steps around the conversion itself — not whether to rent out the house in the first place.

The homestead exemption ends the day it stops being your primary residence

Under Texas Tax Code § 11.13, the general residence homestead exemption and the school district $100,000 exemption (as of recent cycles) require that the property be your principal residence on January 1 of the tax year. The 10% appraised-value cap under § 23.23 depends on the same qualification.

If you move out and rent the property, you must notify BCAD. The form is a written notice to the chief appraiser — BCAD accepts this through its online portal or by mail. Do not wait for them to find out. If BCAD later determines the exemption was improperly claimed, § 11.43(i) allows them to back-assess for up to five years plus a 10% penalty plus interest. On a Stone Oak or Alamo Heights house where the cap has suppressed taxable value for years, that back-assessment can run into five figures.

Two practical consequences:

• Your appraised value will reset off the 10% cap. For a house that has been your homestead for a long time, taxable value may jump substantially the next cycle — budget for it in your rent-vs-hold math.
• You still get to protest. The ARB process under § 41.41 is the same for investment property. File by May 15 or 30 days after the notice of value, whichever is later.

Cost basis for depreciation: lower of adjusted basis or FMV at conversion

This is the step that most new landlords get wrong, and the IRS rule is counterintuitive. Under Treas. Reg. § 1.168(i)-4 and the general conversion rules, your depreciable basis is the lower of:

1. Your adjusted basis in the property (generally what you paid plus capital improvements, minus any prior depreciation), or
2. The fair market value on the date of conversion.

In a market where you bought low and values rose — common for anyone who bought in 78209, 78212, or 78204 before 2020 — this means your depreciation basis is your original cost, not today's value. That is often a worse deduction than owners expect.

Allocate land vs improvements

You depreciate the building, not the land. Land is non-depreciable. The clean source for this allocation is the BCAD property record, which splits assessed value into land and improvement. Pull the ratio from BCAD's public search, apply it to your depreciable basis, and that is the number that goes on the 27.5-year straight-line schedule.

Example mechanics: if your basis is $250,000 and BCAD shows a 20% land / 80% improvement split, your depreciable basis is $200,000. Annual depreciation is roughly $7,272. Your CPA will enter this on Form 4562 the first year, then it flows to Schedule E thereafter.

Document the FMV on the conversion date

Even if your basis is lower, you need the FMV number to prove it. Options: a broker price opinion from a licensed Texas agent, a formal appraisal, or contemporaneous comparable sales from the MLS. Save it in your tax file. If you ever sell at a loss, the loss basis rules under § 1.165-9 use FMV at conversion, and you will not want to reconstruct that number five years later.

Insurance has to switch — an HO-3 will not cover a rental

A standard homeowner's policy (HO-3) is written on the assumption the insured occupies the home. The moment you rent it out, most policies either exclude coverage or void entirely. You need a dwelling fire policy (DP-3 is the common form) plus landlord liability. Premiums typically run higher than owner-occupied, and if the home sits vacant more than 30–60 days between tenants, you may need a vacancy endorsement.

Call your carrier before the lease starts, not after. A fire during an uncovered gap is the fastest way to turn a rental into a lawsuit.

Where the deductions move on your tax return

As an owner-occupant, mortgage interest and property tax were itemized deductions on Schedule A (subject to the SALT cap). After conversion:

• Mortgage interest, property tax, insurance, HOA dues, repairs, utilities you pay, management fees, mileage to the property, and depreciation all move to Schedule E as rental expenses — not subject to the SALT cap and deductible against rental income regardless of whether you itemize.
• Advertising on RentInSA or MLS, tenant screening fees, lease prep, and attorney fees for landlord-tenant work are deductible on Schedule E.
• Capital improvements (new roof, HVAC replacement, kitchen remodel) are not deducted — they are added to basis and depreciated, usually over 27.5 years or the applicable MACRS life.

The distinction between a repair (deducted this year) and an improvement (capitalized) is governed by the tangible property regulations under § 1.263(a)-3. Patching a roof is a repair. Replacing the roof is an improvement. The safe-harbor election for small taxpayers under § 1.263(a)-3(h) lets some landlords expense items up to $10,000 or 2% of unadjusted basis per building — ask your CPA whether you qualify.

The Section 121 clock does not stop immediately — but it does start running out

If you lived in the house as your primary residence for at least 2 of the last 5 years before sale, you can still exclude up to $250,000 of gain ($500,000 married filing jointly) under IRC § 121. The clock keeps ticking after you convert, so if you rent for more than 3 years, you lose the exclusion.

Two wrinkles San Antonio landlords miss:

• Depreciation recapture under § 1250 is not excluded. Any depreciation you claimed (or should have claimed) comes back as ordinary income capped at 25%, regardless of § 121.
• The post-2008 nonqualified use rules under § 121(b)(5) prorate the exclusion for periods of rental use after January 1, 2009. The math gets messy. A CPA with real estate experience can model whether to sell before the 3-year window closes or 1031 into the next property.

What most people get wrong

• Leaving the homestead exemption on after moving out. BCAD back-assesses with penalty under § 11.43(i). Notify in writing the year you convert.
• Using today's market value as depreciation basis. It is the lower of adjusted basis or FMV. On a long-held San Antonio house with appreciation, this almost always means your original cost.
• Depreciating the land. Pull BCAD's land/improvement split and apply it. Land stays on the books undepreciated.
• Keeping the HO-3 policy. It likely does not cover a tenant-occupied home. Switch to a DP-3 or equivalent landlord policy before the first tenant moves in.
• Expensing a new roof. It is a capital improvement under § 1.263(a)-3. Capitalize and depreciate.
• Skipping depreciation to "save it for later." The IRS treats depreciation as allowed or allowable — you owe recapture on it at sale whether or not you actually took it. Take it every year.

Work with a CPA before the first rent check, not at tax time

A 30-minute call with a Texas CPA who handles rental portfolios will cover: whether to make the de minimis safe harbor election ($2,500 per invoice/item), how to document the conversion date, whether a cost segregation study makes sense if your basis is high enough, and whether you qualify as a real estate professional under § 469(c)(7) to deduct losses against ordinary income. These decisions are hard to unwind after the return is filed.

When you are ready to list the converted property, RentInSA lets owners post rentals directly at /list-your-home, and the current market context is useful: as of October 2026, our active listings show a median asking rent of $1,700/mo across Bexar County, with 3BR homes — the most common converted-primary-residence profile — at a median of $1,695/mo. Browse comparable active listings at /rentals to price the unit, and see /resources for more landlord guides on bookkeeping, screening, and lease setup.