When a personal residence is converted to business use (or for use in the production of income), its starting point for basis for depreciation is the lower of (1) the adjusted basis on the date of conversion, or (2) the property’s fair market value (FMV) at the time of conversion (Regs. Sec. 1.168(i)-4(b)).
Example : I purchased a home in Boston in 2004 for $250,000, of which $50,000 represented the cost of the land. I lived in the home until 2008, when I moved to New York. Rather than sell the house, I converted it to a rental property. The property’s FMV, excluding the land, on its conversion to rental property was $185,000. My basis for depreciation is $185,000, the FMV at the time of conversion, since it was less than the adjusted basis. (Adjusted basis is generally the cost of the property plus amounts paid for capital improvements, less any depreciation and casualty losses claimed for tax purposes.)
