How Do I Determine the Depreciation Basis of a Property?

by Ashley Mott

All assets, such as property, automobiles and expensive office equipment, depreciate over time. The depreciation basis of an asset such as automobile or office equipment is determined by subtracting the salvage property from the total initial purchase price. When dealing with real estate property, determining the depreciation basis is a bit more complex, because land retains its value while a structure on the property depreciates over time. The IRS also allows real estate owners to adjust the depreciation basis over time based on certain actions.

Determine the full purchase price of the property. The price includes certain extra charges such as sales tax not previously deducted on tax form Schedule A, Itemized Deductions, the cost of utility installation, the cost of a land survey, recording fees, transferred taxes and title insurance. You may also include any charges you assumed from the seller.

Verify that your initial purchase price estimate does not include closing costs such as points, mortgage insurance premiums, fees associated with loan assumption, credit report costs and required appraisal fees.

Add the cost of real estate taxes paid on behalf of the property seller for which you were not reimbursed to your cost basis total.

Subtract the value of the land on which an investment property is located and subtract the portion of fees allotted to the land price, when applicable, to determine the depreciation basis. For example, if the land's value was 33 percent of the purchase price, 33 percent of the fees associated with the land purchase must be subtracted.

Add the cost of adding additional utility lines, certain legal fees associated with the property, the cost of improvements to the property that will last longer than one year and the cost of returning the property to its previous condition after a casualty loss to the depreciation basis if these events occur.

Subtract any funds received from insurance claims on the property, deducted casualty losses and special depreciation allowances from the depreciation basis when applicable. The IRS also requires select additional adjustments to the depreciation basis specific to certain properties. IRS publication 527, Residential Rental Property, provides a full list of expenses to add to the basis and payments to deduct.

Tips

  • An easy way to find out the value of the land on which your property sits is to check with your local tax assessor's office. Assessors generally break your property tax assessment into two values -- one for the land and one for the structure.
  • If you convert your residence into a rental property, you can claim depreciation for the tax year in which you did the conversion.

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