Q: In reading the instructions for depreciation, I'm not quite certain what is meant by the lower of basis or Fair Market Value. Can you please explain? JE, Nevada
A. When depreciating an asset, the beginning point is when you place the asset into business use. Thus, for example, you could start renting a house which you lived in for 10 years prior to taking off in your RV. The depreciation would start as soon the house becomes available for business use. With the declining real estate market, the depreciable basis would be the lower of the purchase price, less the value allocated to the land beneath the house, plus the capital improvements made during the years you owned the house; or today's fair market value, less the allocation for land value. Whichever of the two is lower, would be the basis for depreciation.
PS. Since my previous answer, depreciation is no longer allowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.