To determine your allowable Depreciation deduction,
you have to make adjustments to the basis of your
property also known as 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.  This includes:
 

The cost of any additions or improvements having a useful life of more than one 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

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

Example: Tony hires an architect to draw up plans for remodeling
his house.  The architect's fee is a part of the cost of the remodeling
and Tony can deduct the architect's fees on his tax return.

Another example would be 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.

Be sure to learn about the difference between repairs and
improvements.

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.

Example: Vinoy owns a home in San Diego,  The city installs
curbing on the street in front of his house, and assesses Vinoy
and his neighbors for the cost of curbing.  Vinoy must add the
assessment to the basis of his property. 

You must also add the cost of legal fees paid to obtain a decrease
in an assessment levied against property to pay for local
improvements.  You cannot deduct these items as taxes or
depreciate them.

Decreases to Basis
You must decrease the basis of your property by any items that
represent a return of your cost.  These include:

 

The amount of any insurance or other payment you receive as the result of a casualty or theft loss   Any deductible casualty loss not covered by insurance   Any amount you receive for granting an easement   Any residential energy credit you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home   The amount of depreciation you could have deducted on your tax returns under the method of depreciation you selected.  If you took less depreciation than you could have under the method you selected, you must decrease the basis by the amount you could have taken under that method.

If you deducted more depreciation than you should have, you must
decrease your basis by the amount you should have deducted, plus
the part of the excess you deducted that actually lowered your tax
liability for any year.




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