Oregon Tax Consultants Practice Exam

How do you determine the basis in property transferred from personal to business use?

1. Use the original purchase price

2. Use the greater of adjusted basis or FMV at transfer

3. Use the lesser of adjusted basis or FMV at transfer

4. Your cost basis remains unchanged

The correct answer is: Use the lesser of adjusted basis or FMV at transfer

When determining the basis in property that has been transferred from personal use to business use, the correct approach is to use the lesser of the adjusted basis or the fair market value (FMV) at the time of the transfer. This is because the Internal Revenue Service (IRS) has specific rules governing the basis for property that is converted from personal to business use in order to prevent taxpayers from claiming excess depreciation or deductions based on unrealized gains. The adjusted basis refers to what you originally paid for the property, adjusted for any improvements made, depreciation claimed while it was used for personal purposes, or other factors that may affect its value. The FMV is the price that the property would sell for on the open market. By choosing the lesser of these two amounts, you ensure that the basis reflects a conservative valuation of the property as it moves into business use. This method prevents overstatement of the property’s value in business accounting and aligns the basis with the potential market value when the property can no longer be used solely for personal purposes. This approach also helps to maintain consistency in how gains or losses are reported when the property is eventually sold as a business asset, as it establishes a foundation for accurately reflecting any appreciation or depreciation that occurred during the transition from personal