IRS Publication – Adjusted Basis

Adjusted Basis

To figure 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 for business or the production of income. The result of these adjustments to the basis is the adjusted basis.

Increases to basis.

 You must increase the basis of any property by the cost of all items properly added to a capital account. These include the following.

• The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year.
• Amounts spent after a casualty to restore the damaged property.
• The cost of extending utility service lines to the property.
• Legal fees, such as the cost of defending and perfecting title, or settling zoning issues.

Additions or improvements.

 Add to the basis of your property the amount an addition or improvement actually costs you, including any amount you borrowed to make the addition or improvement. This includes all direct costs, such as material and labor, but doesn’t include your own labor. It also includes all expenses related to the addition or improvement.

For example, if you had an architect draw up plans for remodeling your property, the architect’s fee is a part of the cost of the remodeling. Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence.

Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. For information on depreciating additions or improvements, see Additions or improvements to property, later in this chapter, under Recovery Periods Under GDS.

.The cost of landscaping improvements is usually treated as an addition to the basis of the land, which isn’t depreciable. However, see What Rental Property Can’t Be Depreciated, earlier..

Assessments for local improvements.

 Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. Also, add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. You can’t deduct these items as taxes or depreciate them. 

However, you can deduct assessments for the purpose of maintenance or repairs or for the purpose of meeting interest charges related to the improvements. Don’t add them to your basis in the property.

Deducting vs. capitalizing costs.

 Don’t add to your basis costs you can deduct as current expenses. However, there are certain costs you can choose either to deduct or to capitalize. If you capitalize these costs, include them in your basis. If you deduct them, don’t include them in your basis. 

The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. 

For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in chapter 7 of Pub. 535.

Decreases to basis.

 You must decrease the basis of your property by any items that represent a return of your cost. These include the following.

• Insurance or other payment you receive as the result of a casualty or theft loss.
• Casualty loss not covered by insurance for which you took a deduction.
• Amount(s) you receive for granting an easement.
• Residential energy credits you were allowed before 1986 or after 2005 if you added the cost of the energy items to the basis of your home.
• Exclusion from income of subsidies for energy conservation measures.
• Special depreciation allowance or a section 179 deduction claimed on qualified property.
• Depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. If you didn’t deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Pub. 551.

If your rental property was previously used as your main home, you must also decrease the basis by the following.

• Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property.
• District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997, and before January 1, 2012.
• Amount of qualified principal residence indebtedness discharged on or after January 1, 2007.