I converted my NYC condo to rental use in 2016 and am in the process of filing for that year. Publication 527 for said year, under "Basis of Property Changed to Rental Use", presents an example that illustrates the exclusion of 'land value' from that basis. In that example, the adjusted basis is calculated using the ACTUAL values of both 'permanent improvements' and 'casualty loss'. This is consistent with the IRS instructions for Line 18 of Schedule E. However, the value used for depreciation on Schedule E (Line 18) in TurboTax is derived from the corresponding value on Form 4562 which, in turn, seems to be taken from the “New Rental Property Worksheet”. On that Worksheet, the percentage calculated for 'Improvements' on line 20 is applied to the entire amount that appears under 'Lesser of Adjusted Basis or Fair Market Value' on line 18. This means that the exclusion for “Land Value” includes a percentage of both 'Increases' (closing costs, capital improvements, etc) and 'Decreases', which do not seem to be associated with “Land Value” in any way. Can anyone explain this apparent discrepancy?
