Depreciation….Whaaaat??

Picking back up on our conversation of depreciation; buy and hold investors will pretty well unanimously call it a blessing rather than curse.  In last week’s post on real estate tax deductibility the term Basis was introduced.  Let’s take a further look at that term…as it is the “what” of depreciation.

At its most basic, Basis is the cost of the item.  With a simple item such as a vehicle the definition would stop there and this would be a really short post.  However, Basis also includes the cost of acquisition and in real estate those line items can be significant expenses.  Here’s a short-list of the most common:

• Contract sales price
• Broker fees if you are paying an agent to represent you
• Assignment fees if you are purchasing from a Wholesaler
• Borrowing costs
• Title charges and/or attorney fees
• Recording and transfer charges

What is not included in Basis?

• Broker fees if they are paid by the seller
• Borrowing costs that are actually pre-payment of interest (i.e. certain points)
• Real property tax escrows
• Hazard insurance escrows

A final item that is NOT included in basis is the portion of the Contract Sales Price that is attributable to land.  Which brings up the question of how do you determine that portion?  Well there are many methods.  How about another list:

• Separate appraisal
• Remember the tax record for the HUD property we looked at; there was a land value determined as part of the assessment
• What is left over

I can hear it now…what do you mean by “What is left over?”  We’ll take that up next week…believe me you will not want to miss this!!

Bryan L. Wakefield, MS Acct.

Principal, Corridor Tax & Accounting, LLC

1020 Philip Powers Dr., Laurel, MD 20707

Office: (410) 630-1538  | Fax: (410) 630-1652

BWakefield@CorTaxAct.com | www.CorTaxAct.com

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