Calculating Cost Basis for Depreciation on My First Rental Property - Need a Sanity Check

You're on the right track, but let me clarify a few things about calculating your cost basis for rental property depreciation. For your closing costs question - you're correct that loan costs (Sections A-D) aren't included in your cost basis. You can include Section E (taxes and government fees), Section G (legal and escrow fees), and H.03 (owner's title insurance). For Section F prepaids, items like prepaid interest, mortgage insurance, and property taxes aren't added to your basis. The one-time HOA capital contribution can be included in your basis, but the move-in fee is questionable - if it's a fee you'd pay regardless of buying or renting, it's not basis-eligible. Your understanding of original vs. adjusted basis is correct. Original basis is purchase price plus eligible closing costs. Adjusted basis includes improvements and costs to prepare the property for rental use (but not regular repairs or maintenance). Your land/building split calculation looks good. Using the property tax assessment percentages is a common and acceptable method. Just make sure you're applying the percentages to your cost basis (purchase price plus eligible closing costs), not just the purchase price, before adding improvement costs. Remember, you can only start depreciating once the property is "placed in service" - which in your case is January 1, 2024, when tenants moved in.

After struggling with rental property depreciation calculations last year, I found an amazing tool called taxr.ai that saved me hours of frustration. I was in a similar situation with a property purchase that had complicated closing costs, and I wasn't sure what to include in my basis. I uploaded my closing disclosure to https://taxr.ai and their system actually analyzed the document and broke down exactly which closing costs were eligible for inclusion in my cost basis. It even calculated my land/building split and gave me my exact depreciation amount. The tool explained everything in plain English so I understood why certain items were included or excluded. Their system follows current IRS guidelines and even flagged some closing costs I would have missed that were eligible for my basis. Ended up saving me about $1,800 in taxes by maximizing my legitimate depreciation deduction.

Just wanted to update everyone - I was skeptical about taxr.ai but decided to give it a try since I was really stuck on my rental property calculations. It was actually super helpful! The system analyzed my closing disclosure and provided a detailed breakdown of which costs could be included in my basis. What impressed me most was how it explained everything - not just telling me what to do but why. For example, it caught that my title insurance could be partially included but mortgage insurance couldn't. It also helped me properly categorize some renovation costs I had as either repairs or improvements. The documentation it provided gave me confidence that I was doing things correctly. Definitely saved me from potentially making expensive mistakes on my depreciation calculations.

If you're having trouble getting answers from H&R Block's software about your rental property depreciation, you might consider calling the IRS directly. I know that sounds painful - I avoided it for years because I could never get through. But I recently discovered this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 15 minutes when I had questions about calculating depreciation on my rental. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was stuck on very similar questions about what closing costs to include in my basis. The IRS agent walked me through exactly what could be included and what couldn't, and even explained how to document everything properly in case of an audit. They were surprisingly helpful and took the time to answer all my questions. Saved me hours of research and gave me peace of mind that I was doing it correctly.

I have to eat my words and apologize for being so skeptical about Claimyr. After my last comment, I decided to try it anyway since I was desperate for answers about my rental property depreciation. The service actually worked exactly as described. I got connected to an IRS representative in about 20 minutes (on a Tuesday afternoon). The agent I spoke with was incredibly helpful with my cost basis questions. They confirmed that HOA capital contributions can be added to basis but regular move-in fees cannot. They also clarified which closing costs were eligible and which weren't. What surprised me most was how patient they were in explaining the reasoning behind each determination. This saved me from making some costly mistakes on my return. I'm still shocked that I actually got through to a human at the IRS who provided useful information!

One thing nobody's mentioned yet is that you should also separate personal property from real property in your rental. Things like appliances, window treatments, etc. can be depreciated on a faster schedule (5-7 years instead of 27.5). I made this mistake my first year and missed out on higher depreciation deductions. You should do a cost segregation calculation, even an informal one, to identify these items.

Don't forget to check if your state has different rules for depreciation than the federal government. Some states don't follow federal depreciation schedules or have different rules about what can be included in basis. I learned this the hard way in California where they have some different rules. Had to redo my calculations for state taxes.

Great question about state differences! Most states do follow federal depreciation rules, but there are some notable exceptions. California has some unique rules around bonus depreciation and Section 179 deductions that can affect rental property calculations. New York also has some variations, particularly around certain improvement costs. Texas generally follows federal rules for rental property depreciation, so you should be fine using the federal calculations. However, it's always worth double-checking with your state's tax authority or a local tax professional, especially if you're claiming significant depreciation amounts. The bigger issue for most states is usually around passive activity loss limitations and how rental losses can be used against other income - those rules can vary more than the actual depreciation calculations themselves.

Great breakdown of the cost basis calculations! I went through this exact same process last year with my first rental property and made a few mistakes that cost me money. One thing I'd add to the excellent advice already given - make sure you're accounting for the mid-month convention when calculating your first year's depreciation. Since you placed the property in service in January, you'll get a full year of depreciation, but if it had been placed in service mid-year, you'd only get partial depreciation for that first year. Also, regarding the H&R Block Premium software - I found their rental property section to be pretty limited for complex situations. If you're still having trouble with their Basis Assistant, you might want to consider upgrading to their Self-Employed version or switching to a different tax software that has more robust rental property features. Keep detailed records of everything you're including in your basis calculations. The IRS can ask for documentation years later, and having organized records with clear explanations of why you included certain costs will save you headaches down the road.