The cost of a capital assets cannot be recovered in the year it is purchased (unless you are able to do so via ). Generally, you recover the cost of a capital asset over time, using depreciation deductions.

The first step in determining your depreciation deduction is to determine the depreciable basis of the asset. Different rules apply depending upon how you acquired the property. Property acquired by purchase. The depreciable basis is equal to the asset's purchase price, minus any discounts, and plus any sales taxes, delivery charges, and installation fees. For real estate, you can also include costs of legal and accounting fees, revenue stamps, recording fees, title abstracts/insurance, surveys, and real estate taxes assumed for the seller. Remember you can only depreciate the buildings—land is never depreciable.

Property acquired by gift. If you acquire property by gift, your depreciable basis is same as the donor's basis at the time of the gift. Personal-use property converted to business use. If you convert personal property to business use, the basis will be the lower of: • the fair market value at the time of the conversion, or • the cost plus any additions or improvements, and minus any deducted casualty losses, up to the time of the conversion.

Allocation Required for Partially Depreciable Assets If the purchase price of property included both depreciable property and nondepreciable property (for example, land and a building) or if you use the property for both business and personal use you are required to allocate the basis. Land and building acquired in a single transaction. A business will frequently acquire both land and an office building. In these cases, only the portion of the price that is attributed to the building is depreciable. In this example, the $70,000 paid for the building could be recovered through depreciation, while the $30,000 paid for the land could not, because land is not depreciable. But wouldn't it be better to allocate as much as possible to the building (say, $90,000), so Raymond's depreciation deductions would be larger and his tax bill would be lower? But, you can expect the IRS to attack your allocation if it doesn't reflect economic reality.

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 of 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. Mixed-use property—personal use and business use. You must allocate basis if you have an asset that is used partly for business and partly for personal purposes, according to the percentage of business use. The allocation method, whether by percentage of space, by number of miles or by amount of time, varies based upon the type of asset.

FALSE - capitalized cost also includes sales tax, shipping and installation costs. Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS).

For most 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. (Special rules apply for determining the and and for.). Basis Allocation Required Among Multiple Assets 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 and these rules are tricky, so consult your tax adviser for more details. Be Aware of Need for Basis Adjustments Your basis in an asset generally does not change over time. A different percentage is applied to the original basis calculation to determine each year's depreciation deduction. However, certain events, such as casualty losses, improvements or trade-ins can require you to make a basis adjustment.

Although the depreciable basis is usually the cost you incurred to acquire the property, you may need to make some basis adjustments, under these circumstances: • Adjustments triggered by events. During the period you use the asset, you may have to adjust for additions or improvements, or casualty losses to the asset. • Trade-in of the original asset. Microsoft Office Word 2007 - What`s New. If you receive an asset in exchange for another, the basis of the new asset is related to the adjusted basis of the old asset.