Cost Recovery & Basis:

“Cost recovery accounting is a system which aims to distribute the cost or other basic value of tangible capital assets over the recovery period of the unit in a systematic and rational manner.  It is a process of allocation, not of valuation”  Committee of Terminology, American Institute of CPA’s.

           Economic Life – useful life of an asset.

1. Residential real estate – 27.5 years (includes residential rental)
2. Commercial real estate – 39 years

Depreciable Basis – that amount which is subject to depreciation

Land is not depreciable but the Improvements are.

Example:

Purchase Price	$125,000
(X) Allocation to Improvements	(X) 80% “Given”
(=) Depreciable Basis	(=) $100,000
(÷) Economic Life	(÷) 27.5
(=) Annual Straight Line Depreciation	(=) 3636.36