Adjusted basis
Cost basis
Cost basis starts with purchase price, capitalised closing costs and improvements. For depreciation, acquisition cost is allocated between land and building, then upfront building improvements are added to the building basis. Land remains part of your investment but is not depreciable. Depreciation already taken reduces adjusted basis and affects taxable gain when you sell.
Depreciable basis = (price + capitalised closing) − land allocation + upfront building improvements
Worked example
$265,000 + $4,200 closing is $269,200 of acquisition cost. Allocate 20%, or $53,840, to land and add $8,000 of upfront building improvements: $223,360 is depreciable.
Rental metric examples use the default $265,000 duplex at $2,650 monthly rent, 25% down and 6.75% over 30 years. Strategy and tax examples use the assumptions stated above rather than that rental deal.
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 — 21 terms with formulas and worked examples.