Start with value on the conversion date
When property previously used personally enters business use, the depreciation starting point generally is the lower of its adjusted basis or its fair market value at conversion. The rule prevents the owner from depreciating a personal decline in value as though the business had caused it. Writing the original purchase price into the fixed-asset ledger does not override that comparison. This matters for equipment, furniture, and other property that has depreciated economically before the business began using it.
Consider an owner who paid $18,000 for photography equipment for a personal hobby. Two years later, the owner begins using it exclusively in an established commercial photography business. Assume adjusted basis remains $18,000, but comparable equipment supports a $10,000 fair market value at conversion. The depreciation analysis starts from $10,000, before considering the applicable recovery rules. Moving the equipment to a different room does not create an $18,000 business investment that can all be deducted.
Separate conversion from an actual acquisition
The business has not necessarily purchased something from an unrelated seller merely because the owner recorded an internal transfer. The legal owner and tax classification matter. A sole proprietor moving personal property into that proprietor’s business has a different transaction from a corporation buying equipment from a shareholder. A contribution to a corporation or partnership can involve its own basis rules and should not be treated as the same conversion worksheet.
Before approving an entry, identify whose property it was before and after the transaction. If there is a purchase agreement, determine whether it is a genuine sale, whether related-party rules apply, and whether a gain is recognized. If it is a contribution, obtain the contribution treatment. For the simple sole-proprietor example, keep the conversion calculation separate from the purchase invoice so the ledger does not imply that cash changed hands when none did.
A later sale can require two bases
The basis used to measure gain can differ from the basis used to measure loss after personal property becomes business property. The original adjusted basis and conversion-date value therefore remain relevant even after depreciation begins. Subsequent depreciation and other required adjustments must be reflected in the appropriate calculations. A single fixed-asset field labeled cost may not preserve enough information to compute the eventual disposition correctly.
In a simplified illustration, assume no intervening depreciation or other adjustments so the two starting figures remain $18,000 and $10,000. A later $14,000 sale lies between them. The transaction does not produce a $4,000 deductible loss merely by subtracting proceeds from original cost, nor a $4,000 taxable gain merely by subtracting the lower conversion figure. Actual business use normally adds depreciation adjustments, which must be incorporated before reaching the final result.
Business use is another measurement
A mixed-use asset requires a supportable business-use allocation. Using a computer for client work does not make family use disappear. The depreciation calculation must reflect the qualifying business portion, and some property is subject to additional listed-property or business-use requirements. A lower conversion value is not permission to assign all subsequent use to the business. It answers a basis question, while the allocation answers a separate use question.
Suppose the converted equipment in the first example is used 70 percent for paid assignments and 30 percent for continuing personal work. The owner should not forecast depreciation on the entire $10,000 as though business use were exclusive. Keep an assignment calendar or other credible usage record that distinguishes the two activities. If business use later changes materially, revisit the depreciation treatment and any applicable recapture consequences rather than copying last year’s percentage automatically.
Build a usable opening asset schedule
Preserve the original invoice, improvements or other basis adjustments, conversion date, and evidence of value on that date. Comparable sales should match condition and specifications; an optimistic asking price for a different model is weak support. Record when the property became ready and available for business use, because merely deciding to use an asset someday does not establish that it was placed in service.
The useful decision is whether transferring the asset meets an operating need at a reasonable after-tax cost. Compare continued personal ownership, conversion, and a genuine new purchase using the appropriate rules for each. Do not assume section 179 or bonus depreciation follows automatically from moving an old asset onto the books. Eligibility, acquisition history, business use, and entity ownership can change the answer, and the final depreciation schedule should explain the chosen treatment.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.