Depreciation as it relates to cost basis

[Justin Long]

I may be thinking about this way to hard. However, I am also a newbie to REI and the tax implications therein. My scenario is simple: Single family home purchased by me and in my name, mortgaged property, and rented out.

Once I have determined total cost basis in the property (purchase price + additional costs to close, etc.), I can then separate the land from the amount.  Then I apply straight line depreciation (structure basis/27.5) for the tax year.  My question is, does my basis for the following tax year decrease by the deduction amount I took in the previous year?  I wouldn't think so, as this would be by definition, NOT straight line.  However, after reading IRS publication 946, it seems unclear, as it states under the Adjusted Basis section on page 12;
"Basis adjustment for depreciation allowed or allowable. You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct."

Am I reading this incorrectly?  Please help!  

[Natalie Kolodij]

Your basis is entered once. 

And that amount is reduced annually- but the depreciation is kept on that same initial amount. You don't re-enter your basis yearly. 

Example: 

Building basis = 100,000

100,000/ 27.5 years = 3636.36 annual deduction. 

Your starting basis is 100k 

At the end of year 1 your adjusted basis is now $96,363.64 (100k-3636.36) 

Your INITIAL DEPRECIABLE basis stays the same. 

Your ADJUSTED basis is exactly that- the currenta mount adjusted for depreciaton. 

So if you sold at the end of year 1 it would be sale price - 96,363 (ignoring all other costs and such) 

Each year depreciation reduces that adjusted basis, so the longer you own it the greater your gain when you sell.