Basis — Glossary — IRS Depreciation Rules

Basis

A taxpayer's economic investment in property for tax purposes. Initial basis is generally cost (IRC §1012); basis is adjusted upward by capitalized improvements and downward by depreciation, casualty losses, and other items under IRC §1016. Basis is the starting point for every depreciation calculation.

STATUTE BASIS · IRC §1011, §1012, §1016

In context

For real property acquired by purchase, initial basis equals the total cost of acquisition: the purchase price plus capitalized closing costs (title, recording, transfer tax, attorney fees attributable to acquisition) minus seller credits.

Basis is adjusted upward by capital improvements and additions to capital, downward by depreciation actually allowed or allowable (whichever is greater — see Treas. Reg. §1.167(a)-10), casualty losses claimed, and certain credits. The adjusted basis at sale determines realized gain.

For depreciation purposes, the relevant figure is depreciable basis — total basis minus the portion allocable to land. Land is not depreciable. The mechanics of partitioning purchase price between land and improvements is the land allocation step that precedes every cost segregation study.

Stepped-up basis on inheritance (IRC §1014), substituted basis on §1031 exchanges, and contributed basis on §721 partnership contributions each modify the initial-basis rule above.