How is the depreciable basis for rental property calculated?

The calculation of the depreciable basis for rental property is crucial for determining the allowable depreciation expense for tax purposes. The depreciable basis reflects the portion of the property's cost allocated for depreciation, which is typically done over a specified period.

To find the depreciable basis, the land value must be separated from the total property value because land does not depreciate. The correct approach involves taking the total basis (which typically includes the purchase cost minus the cost allocated to land) and ensuring it only reflects the part of the property that can be depreciated, which is the building and improvements.

When calculating the depreciable basis, it involves recognizing the total purchase price and then subtracting the value of the land. This value is then relevant in terms of how much is being used for rental purposes, which is where the rental use percentage comes in. Thus, the correct method would calculate the basis minus land value, providing a clear figure that represents the actual depreciable asset that generates rental income. This makes it possible to accurately determine tax benefits derived from depreciation.

Therefore, the reasoning behind arriving at the correct method incorporates both the need to exclude land value (since it doesn't depreciate) while focusing on the allocation based on rental use, solidifying the rationale for why