What Is the Basis of
Your Depreciable Property?

Words you may need to know (see Glossary):

• Abstract fees
• Adjusted basis
• Basis
• Exchange
• Fair market value

To figure your depreciation deduction, you must determine the basis of your property. To determine basis, you need to know the cost or other basis of your property.

Cost as Basis

The basis of property you buy is its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. The cost includes the amount you pay in cash, debt obligations, other property, or services.

Assumed debt. If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt.

Example. You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Your total cost is $140,000, the cash you paid plus the mortgage you assumed.

Settlement costs. The basis of real property also includes certain fees and charges you pay in addition to the purchase price. These are generally shown on your settlement statement and include the following.

• Legal and recording fees.
• Abstract fees.
• Survey charges.
• Owner's title insurance.
• Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

For fees and charges you cannot include in the basis of property, see Real Property in Publication 551.

Property you construct or build. If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code.

Other Basis

"Other basis" refers to basis that is determined by the way you received the property. For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. If you acquired property in this or some other way, see Publication 551 to determine your basis.

Property Changed From Personal Use

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 the following.

1. The fair market value (FMV) of the property on the date of the change in use.
2. Your original cost or other basis adjusted as follows.
1. Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.
2. Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis.

Example. Several years ago Nia paid $160,000 to have her home built on a lot that cost her $10,000. Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Because land is not depreciable, she can only include the cost of the house when figuring the basis for depreciation.

Nia's adjusted basis in the house when she changed it to business use was $178,000 ($160,000 + $20,000 - $2,000). On the same date her property had an FMV of $180,000, of which $30,000 was for the land and $150,000 was for the house. The basis for depreciation on the house is the FMV ($150,000), because it is less than her adjusted basis ($178,000).

Adjusted Basis

To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. These events could include the following.

• Installing utility lines.
• Paying legal fees for perfecting the title.
• Settling zoning issues.
• Receiving rebates.
• Incurring a casualty or theft loss.

For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551.

If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. For more information, see What Is the Basis For Depreciation? in chapter 3.

Previous| First | Next

Publication Index | IRS-Forms Main | Home