Question

I have a question about real estate cost basis. How do I determine real estate basis of real property with improvements?

Answer

Regarding real estate cost basis, the real estate basis of the property in question is the sales price plus certain fees and expenses like:

  • Abstract of title fees
  • Charges for installing utility services
  • Legal fees, like:
    • Title search
    • Preparation of the sales contract
    • Preparation of the deed
  • Recording fees
  • Surveys
  • Transfer taxes
  • Owner’s title insurance
  • Closing costs

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 real estate basis of the condo. You can’t depreciate the land.

You might need to adjust the real estate cost 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 real estate 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 real estate cost basis for depreciation purposes.

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