 Question:

# The original cost basis on a duplex purchased by Mr. Brown was \$750,000. The tax assessor stated the breakdown of values to be 80% improvements and 20% land. Over the first five years, Mr. Brown depreciated the improvements at a rate of 2% each year. Mr. Brown then hired a licensed contractor to install a swimming pool at a cost of \$50,000. Once the pool was completed, how much will the adjusted cost basis in the property be?

A b. \$740,000.
Explaination

Depreciation can only be taken on the improvements (80%) portion of the purchase price. In this example: 80% x \$750,000 = \$600,000 (improvement portion of the original basis). \$600,000 x 0.02 (2%) = \$12,000 per year x 5 years = \$60,000 (accrued depreciation). Then, subtract the accrued depreciation from the original cost basis. \$750,000 (original cost basis) - \$60,000 (accrued depreciation) = \$690,000 (depreciated cost basis). Finally, add \$50,000 for the new swimming pool improvement + \$690,000 (depreciated cost basis) = \$740,000 (adjusted cost basis).