How to use this calculator
Enter the original purchase price and any closing costs paid at acquisition (title insurance, escrow fees, attorney fees). Then specify the land value as either a percentage of the purchase price or a specific dollar amount from your county assessment.
Add any capital improvements you have made to the property. Choose whether to enter total depreciation taken or let the calculator compute it based on years owned using the 27.5 year residential schedule. Optionally enter a sale price to see depreciation recapture and capital gain estimates.
Understanding rental property cost basis
Your cost basis in a rental property starts with the purchase price plus allowable closing costs. Over time, two things change it: capital improvements increase your basis, while depreciation reduces it.
The IRS requires you to depreciate the building portion of residential rental property over 27.5 years using straight line depreciation. Land cannot be depreciated. When you sell, the accumulated depreciation is “recaptured” and taxed at up to 25%, separate from any capital gains.
Frequently asked questions
What is cost basis for a rental property?
Cost basis is the original value of the property for tax purposes. It equals your purchase price plus closing costs plus capital improvements minus depreciation taken. This number determines your taxable gain when you sell.
How do you calculate depreciation on a rental property?
Divide the depreciable basis (purchase price + closing costs minus land value) by 27.5 years. That gives you the annual straight line depreciation deduction for residential rental property.
What is depreciation recapture?
When you sell a rental property, the IRS taxes the depreciation you claimed (or were allowed to claim) at a rate up to 25%. This is separate from capital gains tax and cannot be avoided except through a 1031 exchange or holding until death.
What counts as a capital improvement?
Capital improvements add value, extend the useful life, or adapt a property to a new use. Examples include a new roof, HVAC replacement, kitchen remodel, or room addition. Regular repairs like fixing a faucet or patching drywall are current year expenses, not improvements.
Can you avoid depreciation recapture tax?
The main strategy is a 1031 like kind exchange, which defers both capital gains and recapture tax by reinvesting into another investment property. Heirs also receive a stepped up basis at death, eliminating recapture.