Property that is converted from Personal to Business
use during a given year may be depreciated!   The tax
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 2007, depreciate the property
under MACRS.

Tax Basis for Property After Conversion
The basis for depreciation of property changed from personal to
business use is the lesser of the following:
 

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.

Example:  In 2002 Rich purchased a home for $160,000.  The value of
the land was $30,000.  Before he changed the property to rental use in
2006, 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 basis for
depreciation.  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
basis for depreciation on the house is the FMV on the date of change ($145,000),
because it is less than his adjusted basis ($150,000).


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 2005, 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 2007, depreciate the property by
the straight line or declining balance method based on the salvage
value and useful life.



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