Final answer:
The lower of the actual basis or the fair market value on the date of conversion must be used for depreciation when converting personal use property to business or rental use. This valuation will impact the depreciation deduction the owner of the property can claim for tax purposes.
Step-by-step explanation:
When a piece of property is converted from personal use to business or rental use, tax considerations come into play. Specifically, the question concerns how to value the property for depreciation purposes. The IRS states that you must use the lower of the actual basis or the fair market value (FMV) on the date of the conversion. The actual basis generally refers to the original cost of the property plus any capital improvements made minus any depreciation already taken if the property was previously used for business. The fair market value is the price that property would sell for on the open market.
For example, if you bought a property for $200,000, made $50,000 in capital improvements, and it is worth $230,000 on the date of conversion, you would use the lower value of $230,000 as your basis for depreciation in a business context.