I paid $400,000 for a duplex, put $200,000 into the entire house, and am now doing a condo conversion. The downstairs unit is larger, has use of a garage, and some other amenities.
How do I determine the cost basis of both units separately?
There may be more than one approach. Here is what I suggest.
Check the tax assessors property record and divide the assessed value of the garage by the total assessed value of the entire property. Now multiply this ratio by your $400K purchase price. This gives you the value of the garage. Subtract that number from $400K to determine the cost basis of the dwelling structure.
Add $200K (the cost of your improvements to the dwelling cost basis to get the adjusted basis for the dwelling structure. Now prorate this adjusted basis to each unit based upon the square footage of living space for each unit (get those numbers from the tax assessor, too),
Add the value of the garage to the cost basis for whichever unit gets the garage included in its deed.
For example, according to the tax assessor's information, 15% of the property's assessed value is attributed to the garage. You paid $400K for the property, so $60K is allocated to the value of the garage leaving $340K for the building and grounds.
Since you made $200K in capital improvements to the building, your cost basis for the building and grounds is now $540K.
If the first unit has 800 sq ft of living space and the second has 1200 sq ft, then 40% of the $540K basis, or $216K is attributed to the first unit, leaving $324K for the second unit.
If you are including the garage in the deed to the second unit, then the adjusted basis for the second unit becomes $384K.
[ Edited by NewKidInTown3 on Date 07/27/2007 ]