Question

What are the most significant rules to consider when converting personal-use property to business use?

Which common mistakes may be made during this conversion process?

Answer 1

IRS rules states, when converting personal-use property to business use, the value assigned to the property for depreciation purposes on the date of conversion is the lesser of:

-- the adjusted basis of the property, or

-- its fair market value

The common mistakes that must be avoided during the conversion process are as follows:

-- The rental property or proprietorship conversion of MACRS property from business to personal use will not require immediate recognition of (a) gain or (b) loss.

-- It must modify the depreciation deduction in the year of conversion from business to personal use to show the number of months of asset usage in the business or with the rental properties.

-- At the conversion time, taxable income (called recapture income) need to be create from the previous expensing deductions under Section 179 and excess depreciation deductions on Section 280F(d)(4) listed property (such as computers and vehicles).