 Okay, fair market value FMV This is the price at which the property would change hands between a willing buyer and a willing seller Neither having to buy or sell and both having reasonable knowledge of all the relevant facts now This is a great idea in concept that we use all the time in practice. It's quite difficult It's impossible to know because all property is unique. This is real estate. This isn't stocks That are the same so we can't really we don't know what that is. That's the problem So if you so if you allow fair market value to to be adjusted all the time You end up with with act with it with people making appraisals and stuff that are too high or too low depending on what they're trying To do so we have to use this in concept this idea of fair market value But it's not the easiest thing to come to when you're talking about real estate, which is all unique So sale of similar property on or about the same date may be helpful to figuring the fair market value of the property Figuring the debt the basis the basis for depreciation is the lesser of the fair market value of the property on the date You changed it to rental use or your adjusted basis on the date of the change That is your original cost or other basis of the property plus the cost of permanent additions or Improvements since you acquire it minus deductions for any casualty or theft losses claimed on earlier years income Tax returns and other decreases to debt so notice that thinking about the basis of personal property like a home can be a little bit complex because Unlike with rental property, we don't have to track the basis of the home as closely Oftentimes we it'd be good to do though it because when we sell our personal home We might be subject to a gain and we have to deal with that at that point in time But with rental property, obviously we depreciate the property so we track it pretty closely With a personal home, then you've got to make sure that you're you get the whole basis in there Right so the basis you would think would be once again The cost or basis of the property what you bought the property for plus the cost of permanent additions or improvements Big big things that you improved a new roof and that kind of stuff Minus deductions for any casualty or theft losses claimed on earlier years income tax return So if you had a loss that you claimed because it went down in value or something like that Which is less usual to happen and other decreases to the basis so for increase and decreases to basis You can see adjusted basis in chapter 2 example You originally built a house for one hundred and forty thousand dollars on a lot that cost $14,000 which you used as your home for many years before changing the property to rental use this year You added twenty eight thousand dollars of permanent improvements to the house and claimed a 3500 casualty loss deduction for the damage to the house So part of the improvements qualifies for a five hundred dollar Residential energy credit which you acclaimed on a prior year tax return because land isn't depreciable You can only deduct the cost of the house when When figuring the basis for Depreciation so the adjusted basis for the house at the time of the change in its use was 164,000 so we're talking about the house here. So one hundred forty thousand You built a house for one hundred forty on a lot that cost 14,000 the lot the land isn't depreciable. So we're talking about the building here So we're not adding the 14,000 as a depreciable component before changing the property to rental use you added 28,000 so 28,000 increase because you had permanent improvements to the house and claimed a 3500 casualty loss. So because we got a benefit from the casualty loss We're subtracting the benefit decreasing the basis part of the improvements qualified for a 500 residential energy credit So we're subtracting out the credit Okay, on the date of the change in use your property had a fair market value of 168,000 of which 21,000 was for land and 147,000 was for the house so the basis for depreciation in the house is the fair market value on the date of the change 147,000 because it is less than your adjusted basis of 164,000 so we have to take the lesser of the two so we had to figure out our Adjusted basis and then we're going to figure the fair market value They didn't go into detail on how you figured the fair market value It's basically and you know you could do an assessment an appraisal Let's see what rhymes with appraisal I mean to try to get the fair market value of related properties and that kind of stuff and then we're taking The basis of property is the fair market value because it is less than the adjusted basis Corporate is if you change your corporative apartment to rental use figure your allowable depreciation as explained earlier depreciation methods are discussed in chapter 2 of this publication and publication 946 The basis of all the depreciable real property owned by the corporative housing corporation is The smaller of the following amounts the fair market value of the property on the date you change your apartment to rental use This is considered to be the same as the corporations adjusted basis minus straight-line depreciation Unless this value is unrealistic the corporations adjusted basis in the property on that date Don't subtract depreciation when figuring the corporations adjusted basis If you bought the stock after its first offering the corporations adjusted basis and the property is the amount figured and won under Depreciation earlier the fair market value of the property is considered to be the same as the corporations adjusted basis Figured and this way minus straight-line depreciation unless the value is unrealistic Alright figure in the the depreciation deduction to figure the deduction use the depreciation system in effect When you convert your residents to rental use so generally that will be makers for any conversion 1986 Depreciable property on the books usually treat the property as placed in service on the conversion date Example your converted residents see the previous example under figuring the basis earlier was available for rent on August 1st Using table 2 2d see chapter 2 the percent for year 1 beginning in August is 1.364 percent and the depreciation deduction for year 1 is 2005 so in other words Once we've determined what the the the amount is the adjusted basis to put the property on the books at and the date to put The property that was converted from personal use on the books Then it's pretty straightforward in that we're doing the same kind of thing We did as though we bought the property right because the difference between purchasing the property and Converting the property is the fact that when you purchase the property You know generally pretty well when you bought it and placed it in service And you know generally pretty well what the cost is because you just paid for it when you're converting the property You've got this basis situation that you have to deal with it because you bought it or inherited it or got it in some way