Basis of Depreciable Property: Rental Property Taxes (2025 IRS Guide)

This guide covers “Basis of Depreciable Property” within rental property taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 527 (2025), Residential Rental Property, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

You recover the cost of income-producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.

Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. You can’t simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense.

You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange.

You may have to use Form 4562 to figure and report your depreciation. See Which Forms To Use in chapter 3. Also, see Pub. 946.

Basis of Depreciable Property

The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity.

If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property.

Basis and adjusted basis are explained in the following discussions.

.If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its FMV when you change it to rental use. See Basis of Property Changed to Rental Use in chapter 4..

Cost Basis

The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Your cost also includes amounts you pay for:

• Sales tax charged on the purchase (but see Exception next),

• Freight charges to obtain the property, and

• Installation and testing charges.

Exception.

If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), don’t include as part of your cost basis the sales taxes you deducted. Such taxes were deductible before 1987 and after 2003.

Loans with low or no interest.

If you buy property on any payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. See Unstated Interest and Original Issue Discount (OID) in Pub. 537, Installment Sales.

Real property.

If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property.

Real estate taxes.

If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller doesn’t reimburse you, the taxes you pay are treated as part of your basis in the property. You can’t deduct them as taxes paid.

If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Don’t include that amount in your basis in the property.

Settlement fees and other costs.

The following settlement fees and closing costs for buying the property are part of your basis in the property.

• Abstract fees.

• Charges for installing utility services.

• Legal fees.

• Recording fees.

• Surveys.

• Transfer taxes.

• Title insurance.

• Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

The following are settlement fees and closing costs you can’t include in your basis in the property.

1. Fire insurance premiums.

2. Rent or other charges relating to occupancy of the property before closing.

3. Charges connected with getting or refinancing a loan, such as:

   1. Points (discount points, loan origination fees),

   2. Loan assumption fees,

   3. Cost of a credit report, and

   4. Fees for an appraisal required by a lender.

Also, don’t include amounts placed in escrow for the future payment of items such as taxes and insurance.

Assumption of a mortgage.

If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage.

Example.

You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Your basis is $300,000.

Separating cost of land and buildings.

If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. The part of the cost that you allocate to each asset is the ratio of the FMV of that asset to the FMV of the whole property at the time you buy it.

If you aren’t certain of the FMVs of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes.

Example.

You buy a house and land for $200,000. The purchase contract doesn’t specify how much of the purchase price is for the house and how much is for the land.

The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land.

You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land.

Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000).

Basis Other Than Cost

You can’t use cost as a basis for property that you received:

• In return for services you performed;

• In an exchange for other property;

• As a gift;

• From your spouse, or from your former spouse as the result of a divorce; or

• As an inheritance.

If you received property in one of these ways, see Pub. 551 for information on how to figure your basis.

Adjusted Basis

To figure your property’s basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. The result of these adjustments to the basis is the adjusted basis.

Increases to basis.

You must increase the basis of any property by the cost of all items properly added to a capital account. These include the following.

• The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year.

• Amounts spent after a casualty to restore the damaged property.

• The cost of extending utility service lines to the property.

• Legal fees, such as the cost of defending and perfecting title, or settling zoning issues.

Additions or improvements.

Add to the basis of your property the amount an addition or improvement actually costs you, including any amount you borrowed to make the addition or improvement. This includes all direct costs, such as material and labor, but doesn’t include your own labor. It also includes all expenses related to the addition or improvement.

For example, if you had an architect draw up plans for remodeling your property, the architect’s fee is a part of the cost of the remodeling. Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence.

Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. For information on depreciating additions or improvements, see Additions or improvements to property, later in this chapter, under Recovery Periods Under GDS.

.The cost of landscaping improvements is usually treated as an addition to the basis of the land, which isn’t depreciable. However, see What Rental Property Can’t Be Depreciated, earlier..

Assessments for local improvements.

Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. Also, add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. You can’t deduct these items as taxes or depreciate them.

However, you can deduct assessments for the purpose of maintenance or repairs or for the purpose of meeting interest charges related to the improvements. Don’t add them to your basis in the property.

Deducting vs. capitalizing costs.

Don’t add to your basis costs you can deduct as current expenses. However, there are certain costs you can choose either to deduct or to capitalize. If you capitalize these costs, include them in your basis. If you deduct them, don’t include them in your basis.

The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property.

For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in sections 263A and 266.

Decreases to basis.

You must decrease the basis of your property by any items that represent a return of your cost. These include the following.

• Insurance or other payment you receive as the result of a casualty or theft loss.

• Casualty loss not covered by insurance for which you took a deduction.

• Amount(s) you receive for granting an easement.

• Residential energy credits you were allowed before 1986 or after 2005 if you added the cost of the energy items to the basis of your home.

• Exclusion from income of subsidies for energy conservation measures.

• Special depreciation allowance or a section 179 deduction claimed on qualified property.

• Depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. If you didn’t deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Pub. 551.

If your rental property was previously used as your main home, you must also decrease the basis by the following.

• Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property.

• District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997, and before January 1, 2012.

• Amount of qualified principal residence indebtedness discharged on or after January 1, 2007.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 527 (2025), Residential Rental Property: Depreciation of Rental Property — The Basics — Basis of Depreciable Property — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.