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I am trying to get to my adjusted cost basis on an apartment. I already looked at this page but it would help if someone could help me with this.

Do I need to factor in depreciation, or can I just report the total below? If I must add in depreciation, how to calculate depreciation? Also, any other mandatory amounts that I would need to include for the IRS so I am accurately reporting my adjusted cost basis? ty

I bought the apartment in 2003 for $171,000. Closing fees totaled $5,363.10.

So do I report an adjusted cost basis for the total of $176,363.10?

Keep in mind that the apartment went up in value (3-4 times the original amount). It's current value is $895,000 from the research that I did, in case this make a difference.

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  • I deleted my answer because I was wrong about the depreciation part.
    – D Stanley
    Commented Feb 13 at 16:51
  • Why do you think you need to adjust your bais? Was it a rental? If so, for what period?
    – littleadv
    Commented Feb 13 at 16:55
  • It's a residential but it was rented out for the last 7 years. I saw in the publication that depreciation comes into play. Supposed that I left out depreciation in my cost basis and I sold the apartment soon, my cost basis would be higher and then my profit would be smaller and I'd pay less tax so I am asking if this is an issue or is it enough to report the price that I paid + expenses as noted above. As noted, the apartment went up in value in case this matters.
    – simpleperson
    Commented Feb 13 at 17:40

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It's a residential but it was rented out for the last 7 years. I saw in the publication that depreciation comes into play.

When you're using your property for production of income, you must depreciate it. Even if you never deducted the depreciation on your taxes, your adjusted bases should include the depreciation taken or should have been taken. So you'll need to calculate the adjusted basis of your property when you put it in service 7 years ago, calculate the depreciation amount based on the appropriate depreciation schedule (see instructions to form 4562), and deduct these from your initial basis to reach the current adjusted basis.

You then need to recognize part of the income as depreciation recapture (Sec. 1250), if you have gain on your property. The remaining gain is capital gain.

If you never deducted the depreciation you may want to amend the open tax years to take the deduction, since otherwise you're paying extra taxes. Closed years are... closed, you can no longer claim refund on those.

If you don't report it correctly, when audited the IRS may assess penalties. Since the depreciation amount is roughly $40K, and the tax rate difference is roughly 5%, we're talking about $2k in extra taxes you'd be assessed and all the interest and penalties on that. So do it right. Had you been deducting the depreciation, you'd probably come ahead in taxes if your marginal rate is above 25%.

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