Adjusted basis
Cost basis
Cost basis is what the IRS considers you to have invested: purchase price plus capitalised closing costs plus improvements, less the land value for depreciation purposes and less depreciation already taken. It drives the annual depreciation deduction and the taxable gain when you sell.
Depreciable basis = (price + capitalised closing + improvements) − land value
Worked example
$265,000 + $4,200 closing + $8,000 improvements is $277,200; taking 20% off for land leaves $221,760 to depreciate.
Every example in this glossary uses the same deal: a $265,000 duplex renting for $2,650 a month, bought with 25% down at 6.75% over 30 years, producing $19,310 of net operating income.
The mistake to avoid
Where this is calculated
The rental property depreciation calculator computes this from your own numbers and shows the arithmetic expanded. 27.5-year straight line with the IRS mid-month convention, the annual tax shield, and recapture at sale.
Related terms
- Capital expenditureCapital expenditure is money spent on components with a useful life longer than a year — roof, furnace, windows, a full kitchen.
- Depreciation recaptureDepreciation recapture is the tax owed at sale on the depreciation you deducted along the way.
- 1031 exchangeA 1031 exchange defers capital gains tax and depreciation recapture by rolling the proceeds of an investment-property sale into another investment property.
Back to the full glossary — 20 terms with formulas and worked examples.