Definition and Example of Adjusted Basis
How Adjusted Basis Works
How to Obtain Your Adjusted Basis
Frequently Asked Questions (FAQs)
Definition and Example of Adjusted Basis
The adjusted basis of an asset is its cost after accounting for various tax considerations. You will pay capital gains tax or incur a capital loss based on the difference between the adjusted basis and the amount for which you ultimately sell the asset.
The adjusted basis of an asset is typically the purchase price plus any capital improvements and selling costs, minus any tax deductions you have previously taken for the asset. The higher the adjusted basis, the more capital gains tax you will pay when you sell and realize a profit. You may incur a capital loss if your adjusted basis is particularly high, and losses can be used to offset capital gains on other assets.
How Adjusted Basis Works
Your basis will be the amount you initially paid for the property, such as selling a real estate property that you have not lived in for the required number of years to qualify for the capital gains tax exclusion upon sale. Then, you can add the cost of any capital improvements you have made, along with agent commissions and other selling costs.
You must recover any tax deductions you have previously taken for the property by subtracting them from the basis after adding the costs mentioned above, such as if you have been depreciating the property on your tax returns since you acquired it.
How to Obtain Your Adjusted Basis
The key components of basis calculations are costs plus increases minus decreases. Some items can be added to achieve the adjusted basis, and others must be subtracted.
The initial cost of the property is typically the purchase price – the amount you paid in cash, or through debt obligations, other property, or services. The cost also includes amounts you paid for:
- Sales tax
- Shipping
- Installation and testing
- Consumable taxes
- Legal and accounting fees when they must be capitalized
- Revenue stamps
- Registration fees
- Property taxes if assumed by the seller
Increases in Basis
The basis of ownership increases with all items properly added to the capital account. These costs include any improvements expected to have a useful life of more than one year.
Restoration expenses also increase the basis, but any allowed restoration credit for these expenses must be subtracted before adding them to the basis. Increase the basis by the amount recovered if you had to recover any of the credit.
You must keep separate accounts for each project if you make additions or improvements to a commercial property. You should also capitalize the basis of each one according to the depreciation rules that will apply to the original property if you placed it in service at the same time you placed the addition or improvement in service.
Expenses that can increase the basis of the property include:
- Cost of extending utility service lines to the property
- Impact fees
- Legal fees, such as the cost of defense and title search
- Legal fees for obtaining a reduction in an assessment imposed on the property to pay for local improvements
- Planning costs
- The compounded value of recoverable ground rent
Decreases in Basis
Some items reduce the basis of the property. These items include:
- Section 179 deduction
- Tax-free corporate distributions
- Previously allowed (or allowable) depreciation, depletion, and amortization
- Some vehicle credits
- Home energy credits
- Deferment of profit from the sale of a home
- Investment credits (partially or fully)
- Casualty losses and theft and insurance reimbursements
- Some canceled debts excluded from income
- Deductions treated as adjustments to the sale price
- Use rights
- Large automobile tax
- Adoption tax credits
- Childcare credits provided by the employer
Frequently Asked Questions (FAQs)
How do you report the adjusted basis?
You will report the adjusted basis of your assets or properties on your tax returns. The form you will typically use is Form 8949, which deals with the sale of capital assets.
How do you calculate the adjusted basis?
To find your adjusted basis, take the basis cost or purchase price, add any increases to the basis, then subtract any decreases. The result is your adjusted basis. Increases in basis will include items such as capital improvements, while decreases can include any depreciation or tax credits you have previously taken.
Source:
https://www.thebalancemoney.com/adjusted-basis-3193414
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