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Student Question of the Week: Adjusted Basis in Property – An Example

Student Question from: Susan M.
Course:  Income Tax

Student Question:

On Question 2  – Why are we adding the $2,500 security in as a capital addition when it does not lengthen the life of the building?  By definition, doesn’t it have to extend the life of the asset by at least 1 year?

2. Madden Incorporated owned the building for five years, during which time the following occurred:

  • The building (not the furniture) was depreciated $8,000 per year.
  • The fair market value of the building increased by $30,000.
  • A $2,500 security system was installed.
  • The elevator was repaired annually at a total cost of $5,000.

At the end of the five-year period, what is Madden Inc.’s adjusted basis in the building?


Instructor Response:

Hi Susan!

Yeah, this one could be difficult to determine how to handle.  However, a security system would be seen as a capital addition because it increases the value of the building.  In general, when talking about capital additions, we’re talking about additions that will increase the usefulness of the asset by more than a year – not short-term repairs.  So if you repair a leaky faucet, that’s not a capital addition.  But if you replace an entire bathroom with updated fixtures and such, that is a capital addition.  Again, this includes anything that will add value to the asset.  So in this case, a security system is not just a repair or short-term fix of something.  Having a security system is going to add value to the building and could even be argued it would add to the life of the building (more than a year) by helping protect it from theft and vandalism.

Hope that helps!