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What if, for a single purchase price, you purchase an asset that is only partly depreciable? Before you can determine the depreciable tax basis of the asset, what you need to do is to allocate the price between the depreciable part and the nondepreciable part.
If an IRS auditor raises objections, you may need to bring in a real estate appraisal to support the allocation you use. In some states, real estate tax bills will show a separate assessment for the buildings and the land on a piece of property, which can be useful evidence in an IRS audit. Ideally, the allocation should have been made as part of the sales contract with which you originally acquired the property, and you should be prepared to prove that the allocation was a part of good faith negotiations between yourself and the seller.
If you acquire a number of assets at the same time (for example, you acquire a number of business assets in the course of buying a business), you need to allocate the purchase price among the various assets you purchased. The IRS provides special rules for doing this consult your tax advisor for more details.
Mixed-use property. You also need to make an allocation if you have a single asset that is used partly for business and partly for personal purposes; for example, if you have a home office, or a car that you use sometimes for work and sometimes for family driving.
You will need to allocate the cost of the asset according to the percentage of usage that is strictly for business. For example, if 20 percent of the square footage of your home is used as an office, you may be able to depreciate 20 percent of the cost of the home; if 60 percent of the mileage you drive in your car is for business purposes, you may be able to depreciate 60 percent of the cost of the car.
For other business assets, the allocation would ordinarily be based on the amount of time you used the asset for business, compared to the amount of time you used it for personal or family purposes.