Document the use change rather than just the move
An owner begins using a personally held building as the business's office or workshop. The property may already have years of personal history, improvements, and market fluctuations. IRS Publication 946 explains that property converted from personal to business use generally uses the lower of adjusted basis or fair market value at conversion for depreciation. The original purchase price or current appraisal alone is therefore insufficient. Establish both figures and allocate land separately.
Identify the taxpayer using or leasing the premises. Personal ownership with rent paid by a corporation is different from contributing the property to that corporation or selling it to another entity. The conversion analysis does not substitute for those transfer rules. Record when the property became ready and available for business use, which areas are used, and whether personal use continues. A change in the owner's intention without an actual supported use change is not enough to build a depreciation schedule.
Show the lower-basis rule in dollars
Consider a hypothetical personally used building with $360,000 of adjusted basis excluding land and a $300,000 fair market value when converted fully to qualifying business use. Before later capital additions, its depreciation basis is generally $300,000. The $60,000 preconversion decline does not become an immediate business deduction merely because the business moves in. If the facts instead establish $420,000 of building value, the starting depreciation basis generally remains $360,000 rather than stepping up to the appraisal.
Keep land out of both comparisons. A property-wide appraisal must identify the building and land values so the lower-of calculation is meaningful. Capital improvements made before and after conversion may affect the schedules differently. Financing does not reset basis: borrowing $400,000 against the property does not make $400,000 its depreciation basis. The example is deliberately simplified; mixed use, casualty adjustments, and entity transfers require additional calculations rather than a blanket application of these numbers.
Preserve more than one basis when needed
The basis used for depreciation may differ from the basis relevant to a later gain or loss calculation. IRS Publication 544 describes special rules for property changed from personal to business or rental use, including loss-basis limitations. Keep original adjusted basis, conversion-date value, and depreciation adjustments in separate columns. A single opening fixed-asset number can erase facts needed when the premises are eventually sold.
This matters when the property's market value recovers. The owner should not assume that the lower depreciation basis automatically controls every later gain calculation, or that a preconversion personal decline becomes deductible on a later sale. Plan for the next transaction by retaining the valuation and historical cost evidence now. If the business uses only part of the property, support the allocation with floor plans, measurements, and actual use. Update that allocation when personal space becomes business space or the business relinquishes part of the premises.
Compare conversion with leasing another location
The owner's choice should include opportunity cost. A personally owned property may be available without a new purchase, but using it can eliminate rental income or a personal use the owner values. Compare conversion spending, ongoing maintenance, insurance changes, zoning, accessibility, and travel costs with an outside lease. Use actual market rent assumptions where relevant. Tax deductions do not determine whether the location serves customers or supports staff effectively.
Also identify expenditures needed to adapt the property. A significant conversion project may create capital improvements rather than current repairs. Establish a project code before contractors begin and retain the original condition evidence. Insurance and occupancy approvals should reflect the new use. If a corporation will reimburse or rent from the owner, document that arrangement separately. The goal is a premises decision with a clear operating purpose, funding plan, and supported tax opening position.
Build the conversion file
Collect purchase documents, improvement invoices, prior basis adjustments, a conversion-date valuation, land allocation, floor plans, use evidence, and occupancy records. Retain the first business-use date and the reasoning behind it. Ask the preparer to preserve the separate depreciation and disposition basis histories, then reconcile the first year's deduction to the applicable property class and convention. Update the property reserve for the new operating costs. These records should survive a preparer change and remain available through the eventual disposition.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.