Words you may need to know (see Glossary)
- Abstract fees
- Adjusted basis
- 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.taxmap/pubs/p946-005.htm#en_us_publink1000107366
The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception, below), freight charges, and installation and testing fees. The cost includes the amount you pay in cash, debt obligations, other property, or services. taxmap/pubs/p946-005.htm#en_us_publink1000107367
You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). If you make that choice, you cannot include those sales taxes as part of your cost basis.taxmap/pubs/p946-005.htm#en_us_publink1000107368
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. taxmap/pubs/p946-005.htm#en_us_publink1000107369
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.taxmap/pubs/p946-005.htm#en_us_publink1000107370
The basis of real property also includes certain fees and charges you pay in addition to the purchase price. These generally are 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. taxmap/pubs/p946-005.htm#en_us_publink1000107371
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. taxmap/pubs/p946-005.htm#en_us_publink1000107372
Other basis usually 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.taxmap/pubs/p946-005.htm#en_us_publink1000107373
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.
- The fair market value (FMV) of the property on the date of the change in use.
- Your original cost or other basis adjusted as follows.
- Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.
- Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis.
Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. 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. Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation.
Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000).taxmap/pubs/p946-005.htm#en_us_publink1000107375
Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. See Like-kind exchanges and involuntary conversions under How Much Can You Deduct in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4.
There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. See How Do You Use General Asset Accounts in chapter 4.taxmap/pubs/p946-005.htm#en_us_publink1000107376
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 also may 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 4.taxmap/pubs/p946-005.htm#en_us_publink1000107377
You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct.
If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable.
If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed).