Basis when property is part business, part personal

Two situations Publication 551 covers

Publication 551 deals with mixed personal and business use in two places. The first is a change of use: you hold property for personal use and later move it into business or rental use, such as renting out your former main home. The second is a nontaxable exchange of real property that is partly used in a business and partly for personal purposes. Both turn on splitting the property into business and nonbusiness pieces and tracking basis separately for each.

Changing a home to rental use

Once property starts producing rent or goes into business use, you must figure a basis for depreciation. Publication 551 sets that basis at the lesser of two numbers: the fair market value of the property on the date of the change, or your adjusted basis on that date. The effect is that losses that happened while the property was personal use, such as a market decline, cannot be turned into depreciation deductions.

Land is not depreciable, so when the property includes land you work with the building alone. The publication's example: several years ago you paid $160,000 to have a home built on a lot that cost $25,000. You paid $20,000 for permanent improvements and claimed a $2,000 casualty loss deduction before changing the property to rental use last year. Your adjusted basis in the house at the change is $178,000 ($160,000 plus $20,000 minus $2,000). On the same date the property was worth $180,000, of which $15,000 was land and $165,000 was the house. The basis for depreciating the house is the $165,000 fair market value, because it is less than $178,000.

Basis when you sell: gain

If you later sell the converted property at a gain, the basis for figuring the gain is your adjusted basis at the time of sale. In the publication's version of the example you were allowed $37,500 of depreciation. The adjusted basis for gain is $165,500: the $178,000 adjusted basis of the house plus the $25,000 land cost, minus $37,500 of depreciation. Note that the gain calculation does not use the lower $165,000 depreciation basis; it uses the actual adjusted basis.

Basis when you sell: loss

If you sell at a loss, the rule starts from the smaller of the adjusted basis or the fair market value at the time of the change, then you adjust for the period after the change. In the example, the adjusted basis of the whole property (house and land) at the change is $203,000 ($178,000 plus $25,000), and the fair market value is $180,000. You start with $180,000 and subtract the $37,500 of depreciation, which leaves a basis for loss of $142,500. The calculator above gives all three numbers: the depreciation basis ($165,000), the gain basis ($165,500) and the loss basis ($142,500) when you enter 178,000, 165,000, 25,000, 15,000 and 37,500.

Because gain and loss use different starting points, a sale price that falls between the two figures would show neither a gain nor a loss. That follows from applying the two rules as written; the publication does not state it for this case.

Exchanging mixed-use real property

If you exchange real property that is partly business and partly personal for real property you will use wholly or partly in your business, the publication says to figure the basis separately for each part. The business part is a like-kind exchange. The personal-use part is treated as property on which gain is recognized: you are deemed to have received, for the personal-use part, an amount equal to its fair market value on the date of the exchange. The basis of the property you acquire is the total basis of the property transferred, adjusted to the date of the exchange, increased by any gain you recognize on the nonbusiness part. For the business part you first deduct the depreciation you took or could have taken. If the nonbusiness part was your main home, the publication notes you may qualify to exclude some or all of the gain, and points to Publication 523.

Practical points

Write down the fair market value on the date of the change, with an appraisal or comparable sales, and split it between land and building. If you cannot split it from an appraisal, assessed values are the fallback the publication allows for allocating a lump sum between land and buildings. The depreciation itself is figured under the rules in Publication 946. The home sale exclusion can interact with rental years, so check the rules for a main home before you rely on the arithmetic above.

Sources

• IRS Publication 551, Basis of Assets (12/2025): Property Changed to Business or Rental Use (Basis for depreciation, Sale of property, Gain, Loss); Partial Business Use of Property. Read November 2, 2026.

Edition read: Publication 551 (12/2025). This page summarizes the publication and does not replace it.