Can you depreciate personal property converted to business?

The short answer, and what it depends on

Personal property cannot be depreciated, but the same property can become depreciable on the day you start using it for business or to produce income. Publication 946 handles this in two places. In the section on when depreciation begins, it says that if you place property in service in a personal activity you cannot claim depreciation, but if you then change the use to a business or income-producing activity you can begin to depreciate it at the time of the change, and you place it in service in the new activity on that date. In the section on basis, it says what the starting number is.

The basis rule

If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of two amounts. The first is the fair market value of the property on the date of the change in use. The second is your original cost or other basis, increased by the cost of any permanent improvements or additions and other costs that must be added to basis, and decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Taking the lower number prevents you from converting a personal loss into a deduction. If the property fell in value while you used it personally, that loss is not recognized by depreciating from your higher cost; the lower fair market value controls. If it rose in value, you cannot depreciate the gain either, and your own adjusted basis controls.

The publication’s worked example

Nia paid $160,000 to have a home built on a lot that cost $25,000. Before changing the property to rental use last year, Nia paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction. Land is not depreciable, so only the cost of the house is used. The adjusted basis in the house at the change was $178,000, which is $160,000 plus $20,000 minus $2,000. On the same date the property had a fair market value of $180,000, of which $15,000 was land and $165,000 was the house. The basis for depreciation is the fair market value of the house, $165,000, because it is less than Nia’s adjusted basis of $178,000. Enter 160,000, 20,000, 2,000 and 165,000 above to reproduce it. Note that the land value is excluded from the fair market value you enter: both numbers in the comparison relate to the building only.

Which tax year, which convention

The year you convert is the first year you can claim depreciation, and the convention that sets the first-year amount follows from the month of the change. For a home converted to a rental, the property is residential rental property with a 27.5-year recovery period. A personal home that you start using partly as an office is treated differently: if your home is a single-family residence and you begin using part of it as an office, the publication says to depreciate that part as nonresidential real property over 39 years. If you began renting a home that was your personal home before 1987, you depreciate it as residential rental property over 27.5 years. For example, converting the house above in July would use the mid-month convention described on the page about when property is placed in service, giving 5.5 months in year one. On $165,000 over 27.5 years the full-year amount is $6,000, and the first-year amount for a July conversion is $6,000 times 5.5 over 12, or $2,750.

It applies to equipment too

The rule is not limited to houses. A computer or a camera you bought for personal use and then start using in a side business follows the same route: the date of the change is the placed-in-service date, and the basis is the lesser of fair market value then and your adjusted basis. If you use the item partly for personal purposes after the change, depreciation is based only on the business or investment use, and the publication requires you to keep records of business, investment and personal use. Inventory, however, cannot be depreciated at all, because it is held for sale.

Interaction with later sale

The basis you establish at conversion is also the starting point for your later gain or loss. Depreciation allowed or allowable reduces your basis, and the publication specifically warns that if you fail to claim depreciation you were entitled to, you must still reduce the basis by the full amount allowable. For that reason, converting a home to a rental and not claiming depreciation does not preserve basis. The tax cost of depreciation you did claim on real property shows up when you sell, which the depreciation recapture calculator estimates, and the home sale capital gain exclusion calculator covers the personal-residence side.

Limits of this page

Home office deductions have their own rules in Publication 587; see the simplified home office deduction calculator. Land must always be removed from the depreciable amount; see is land depreciable. Listed property, such as a car converted to business, adds the limits discussed in what is listed property.

Sources

• IRS Publication 946, How To Depreciate Property (2025): Chapter 1, What Is the Basis of Your Depreciable Property? (Property changed from personal use) and Placed in Service (Conversion to business use). Page last reviewed or updated by the IRS April 30, 2026. Read November 2, 2026.

Edition read: Publication 946 (2025), for use in preparing 2025 returns. Limits and percentages quoted are for 2025 unless a page says otherwise. For tax years beginning in 2025 the publication gives a section 179 limit of $2,500,000, reduced dollar for dollar once qualifying purchases exceed $4,000,000, and $31,300 for heavy sport utility vehicles. Its What’s New for 2026 section gives $2,560,000, a $4,090,000 purchase threshold and $32,000. For qualified property acquired and placed in service after January 19, 2025 the special depreciation allowance is 100 percent, with an election for 40 percent in the first tax year ending after that date; for qualified property acquired before January 20, 2025 and placed in service in 2025 it is 40 percent. Check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.