How Do You Calculate Each Depreciable Asset’s Actual Cost?

As mentioned above, the cost of buying a house is more than its purchase price. You can add attorney’s fees, closing costs, transfer taxes, and the cost of making subsequent improvements to the property. Added together, these are called the "basis" of the property. The complete basis of a property can be depreciated.

What if you inherited the property and, therefore, did not pay for it? You are still expected to claim depreciation deductions for this. As you obviously cannot use your purchase price as your starting point, your "basis" is the fair market value at the time of the death of the previous owner. In this case, you will need to subtract the value of the land.

Instead of buying or inheriting a property they choose to rent, some owners convert a property where they previously lived in for rental use. In this case, your basis for depreciation is either the property’s fair market value on the date of the change or your own cost basis adjusted on the property on that date, whichever is less.