Many factors affect the basis of your rental property.
The basis is another term for the amount you have invested in an asset. Typically it is the purchase price, which may change during the time the asset is held, and this is called the adjusted basis. For rental property, correctly calculating both the basis and adjusted basis is necessary for tax purposes, especially when you want to sell the property.
Instructions
Determine the Cost Basis
1. Start with the purchase price of your home. Add the following settlement and closing costs: abstract (title) fees, installation of utilities, legal fees (including title search and sales contract preparation), recording fees, surveys, transfer taxes and owner's title insurance.
2. Add any fees or taxes you paid to or on behalf of the seller. These include back taxes, interest, repairs or sales commissions.
3. Exclude charges for casualty insurance premiums, rent or utilities for use of the property before closing. You may deduct these as expenses on Schedule E for the year in which they were incurred.
4. Exclude costs of obtaining financing or refinancing, including points, mortgage insurance premiums, loan assumption fess, credit reports and appraisal fees. These charges should be capitalized separately from the property itself and deducted over the life of loan, rather than added to basis.
Additions to the Basis
5. Start with the cost basis as previously determined.
6. Add the cost of capital improvements to the property, including replacing the entire roof, building an addition, paving the driveway, rewiring or installing air conditioning. These add to the value of the property. Additionally, include costs to repair damage to the property, whether or not it was covered by insurance. Routine maintenance is not an addition to basis.
7. Add assessments for local improvements. These are levied in addition to annual property taxes, and may cover roads, sidewalks or water connections. Your regular property taxes do not affect the basis of the property and should be deducted as expenses each year. Maintenance costs on the local improvements can also be expensed.
8. Add zoning fees and any legal costs you pay to defend a title to the property.
Decreases to Basis
9. Subtract any deductions made in prior years for amortization and depreciation on the property. Your tax returns should show accumulated amounts for these deductions.
10. Subtract any tax credits received for energy improvements such as solar power or energy-efficient appliances. Only the net cost of improvements increases the basis.
11. Subtract any insurance payments received against casualty loss or theft as well as the amount of any tax deduction you made against such damage. The cost to repair damage was an addition to the basis, but only to the extent not reimbursed by insurance. For example, if a storm damaged your home and repairs cost $10,000, for which insurance covered $8,000, the result is a $2,000 net increase to the basis.
12. Total all the decreases to basis, and subtract from the adjusted basis to determine the correct basis for your rental property.
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