What is Adjusted Basis
To determine your allowable depreciation deduction for your rental property, you have to make adjustments to the basis of your property also known as the Adjusted Basis, or Adjusted Tax Basis.
Increases to Tax Basis
Your adjusted basis is based on increases in 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, or for obtaining a reduction of an assessment levied against property to pay for local benefits.
Additions or Improvements and Adjusted Basis
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. Improvements include room additions, new bathrooms, decks, fencing, landscaping, wiring upgrades, walkways, driveway, kitchen upgrades, plumbing upgrades, and new roofs.
Adjusted Basis 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.
Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity.
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.
Assessments for local improvements 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 Adjusted Basis of Property
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.