The starting point to determine how much depreciation you can
claim on a business asset is it's tax basis. 

Rental Property
To calculate how much depreciation you can claim on each
house, you must first determine what proportion of it's value is in
land.  Land is not depreciable.  The Internal Revenue
Service's reasoning is that the land will maintain its value and
therefore cannot be depreciated.  Land does not wear out, become
obsolete, or get used up.  The cost of land generally includes the
cost of clearing, grading, planting, and landscaping. 

Example: Doug purchase a piece of rental property for $200,000.
The tax assessor for the county assessed the value of the land to
be $50,000 and the house to be $150,000.  Houses are currently
supposed to last 27.5 years so Doug would divide the $150,000
by 27.5 resulting in $5454.55.  Since Doug is "losing" value in his
rental property, the IRS will let him deduct this loss against his
rental income as long as he qualifies as an active investor. 

The government allows you to take a deduction each year for
depreciation.  The theory of depreciation is that your property
gradually degrades over time.  In the case of personal property,
such as a car, this theory is true but real property is another story.
Generally, over time real property appreciates.

Conversion of Property from Personal Use to Rental Property
When you convert your personal residence to a rental property,
you can begin to claim depreciation in the year you converted it to
rental property because its use changed to an income producing
use at that time.  The tax basis of the rental property is is the lower of
the following:
 

The Fair Market Value (FMV) of the property on the date of the change in use. The adjusted basis of the property.

The adjusted basis is the original cost of the building, excluding the value
of the land, plus  permanent improvements and other capital costs, and
minus  items that represents a return of your cost, such as casualty or theft
loss deductions claimed on prior tax returns.

Example:  In 2001 Matt Fuller purchased a home for $160,000.  The value of
the land was $30,000.  Before he changed the property to rental use in
2007, Rich paid $20,000 for permanent improvements (a new furnace,
a new roof, and a remodeled bathroom).  Improvements are added to the
tax basis of the home.  Since land is not depreciable, Matt will include only
the cost of the house when figuring the basis for depreciation.  The adjusted
basis of the house is $150,000 ($160,000 + $20,000 - $30,000).  On the same
date, his property has a FMV of $185,000 of which $40,000 was for land and
$145,000 for the house.   The basis for depreciation on the house is the FMV
on the date of change ($145,000), because it is less than his adjusted
basis ($150,000).

Assumed Debt
If you buy a 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 your assumed.

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

Furniture, Appliances, Equipment
The basis of these type of properties are based on the amount you
paid for the property plus amounts paid for items such as sales tax,
freight charges, and installation and testing fees. 

Example: If you bought an appliance used in your rental property,
a refrigerator for example, and paid $1,000 plus 7% sales tax as
well as a $150 delivery charge, the tax basis would be $1,220
[($1,000 x 7%) + $150].  The $1,220 is the maximum amount that you
could claim as depreciation over the life of the asset.

As with personal property, if you convert property from personal use
to business use, you may depreciate it.

Example:  Using the example above, assume Rich purchased a
new refrigerator for $750 on April 1.  The IRS allows a faster write off for
personal property (computers, office furniture, washer, dryer, etc...) than
for real property, such as a rental property.  The IRS states that a
refrigerator has a 7 year recovery period.  The first year percentage for
this type of property is 14.29%.  Thus Rich would be allowed to deduct
$107.18 ($750 x 14.29%). 

This is a relatively simple explanation of depreciating personal property.
For a greater understanding we highly encourage you to read more about
depreciation in our "Depreciation Methods" section.

Tax Basis of Inherited Property
Your tax basis in property your inherit from a decedent can be determined
in several scenarios.  Click to learn how to determine the tax basis of property
via inheritance.


Adjusted Basis for Depreciation
Before you can figure the allowable depreciation, you may have to
make certain adjustments (increases and decreases) to the tax
basis of the property.  The result of these adjustments to the basis
is the adjusted basis.

Click here to learn more about the adjusted tax basis for your property


If you can depreciate property you inherited, you generally must used the
modified accelerated cost recovery system (MACRS) to determine
depreciation. 


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