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How do I determine the basis of real property with improvements?
The basis of real estate you bought is the sales price plus certain fees and expenses like:
If you bought the land and condo for a lump sum, allocate the basis between the land and the condo. This is necessary to determine the depreciable basis of the condo. You can’t depreciate the land.
You might need to adjust the basis for things you did after you bought the rental home but before you placed it in service. So, you'd add the cost of additions or improvements to your basis.
Ex: You have a rental condo you bought for $305,000. The assessed value of the land is $129,000. The assessed value of the improvements is $70,000.
Calculate your basis in the condo by subtracting the basis of your land from the purchase price:
$305,000 - 129,000 = $176,000 basis
If you made the improvement before you placed the rental property in service, add the improvement to your condo's basis:
$176,000 + $70,000 = $246,000 basis
Unless you have other adjustments, you'll use one of those results as your basis for depreciation purposes.