Estimating depreciation basis cost

[Javier P.]

Hello everybody,

I have read a lot of the old postings related to estimating the cost basis for depreciation of a rental property; however, I am not clear yet on how to answer the following question:

In 2013 I bought a rental property for $116K and also replace appliances and performed minor repairs for $5K. Therefore total investment: $121K.

The accountant at time took the whole $121 and divided for 27.5 years. That has been the depreciation used since then.

I am not working with that account anymore, but now reading IRS publication 527 and other related publications I understand that the cost basis for depreciation should have been different as follows:

The tax assessment for the property is: $100K, which $30 are for land (30%) and $70 for the building (70%).

From IRS publication 527, I understand that my basis cost for depreciation must be only the percentage cost of the building plus improvements at the time of getting ready to rent.  The building cost can be  estimated using the percentages of the tax assessment.

Depreciation basis cost = ($116K x 0.7) + $5K = $86, 200  

I understand this new number is not as favorable as the initial $121K; however, I prefer to be on the safe side  and no risk to waste time and money in the future making corrections.

Thank you for your help.

[Brandon Hall]

@Daria B. @Javier P.

Correct, the cost basis should be $86,200, not the full purchase price as you need to account for land.