Depreciation Basis Converting Property from Personal to Business Use

Property that is converted from Personal to Business use during a given year may be depreciated. The tax depreciation basis of the property is based on the Adjusted Basis of the property or the Fair Market Value.

What if you convert personal property to business use during the year? If you use furniture or equipment in your home office that was previously used for personal purposes, you cannot take the 179 deduction for the property. You can depreciate it though. The method of depreciation you use depends on when you first used the property for personal purposes.

If you began using the property for personal purposes after 1986 and change it to business use in 2014, the depreciation basis of the property that you can depreciate is found under MACRS.

Tax Depreciation Basis for Property After Conversion

The depreciation basis of property changed from personal to business use is the lesser of the following:

      1. The adjusted basis of the property on the date of change.
      2. The fair market value of the property on the date of change.

Hire an appraiser to estimate the fair market value of your house when it is rented. This appraisal will help support your basis for depreciation or a loss deduction on a sale if your return is examined.

Fair Market Value

This is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.

Adjusted Basis

The adjusted basis is your original cost or other basis in the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years income tax returns and other decreases to basis.

Personal to business depreciation example: In 2009 Rich purchased a home for $160,000. The value of the land was $30,000. Before he changed the property to rental use in 2014, Rich paid $20,000 for permanent improvements (a new furnace, a new roof, and a remodeled bathroom). Since land is not depreciable, Rich will include only the cost of the house when figuring the depreciation basis. The adjusted basis of the house is $150,000 ($160,000 + $20,000 – $30,000). On the same date, his property has a FMV of $185,000 of which $40,000 was for land and $145,000 for the house. The depreciation basis on the house is the FMV on the date of change ($145,000), because it is less than his adjusted basis ($150,000).

Depreciation Basis for Property Placed Into Service Prior to 1987

If you began using the property for personal purposes after 1980 and before 1987 and change it to business use in 2014, you generally depreciate the property under the accelerated cost recovery system (ACRS). However, if the depreciation under ACRS is greater in the first year than the depreciation under MACRS, you must depreciate it under MACRS. For more information on ACRS, see IRS publication 534, Depreciating Property Placed in Service Before 1987.

If you began using the property for personal purposes before 1981, and change it to business use in 2014, depreciate the property by the straight line or declining balance method based on the salvage value and useful life.

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