What Is Adjusted Basis for Tax Purposes?

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Adjusted basis is the cost of an asset after adjusting the cost for various tax-related items.

To calculate adjusted basis, we start with the original purchase price of an asset. From there we can increase basis by the amount of money spend improving the asset or by amounts paid for legal fees or selling costs. We decrease basis by taking into account amounts deducted for depreciation, casualty losses or theft losses.

The IRS discusses basis and adjusted basis in detail in Publication 551, Basis of Assets.

The following table highlights the key components of basis calculations.

Cost Basis

The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items.

  • Sales tax,

  • Freight,

  • Installation and testing,

  • Excise taxes,

  • Legal and accounting fees (when they must be capitalized),

  • Revenue stamps,

  • Recording fees, and

  • Real estate taxes (if assumed for the seller).

Source: cost basis section of Pub. 551.
   
Adjusted Basis
Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. The result of these adjustments to the basis is the adjusted basis.
   
Increases to Basis  
Increase the basis of any property by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year.  
Rehabilitation expenses also increase basis. However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. If you have to recapture any of the credit, increase your basis by the recaptured amount.  
If you make additions or improvements to business property, keep separate accounts for them. Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. For more information, see Publication 946.  
The following items increase the basis of property:  
The cost of extending utility service lines to the property;  
Impact fees;  
Legal fees, such as the cost of defending and perfecting title;  
Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements;  
Zoning costs; and  
The capitalized value of a redeemable ground rent.  
   
Decreases to Basis
The following are some items that reduce the basis of property:  
Section 179 deduction;  
Nontaxable corporate distributions;  
Deductions previously allowed (or allowable) for amortization, depreciation, and depletion;  
Exclusion of subsidies for energy conservation measures;  
Certain vehicle credits;  
Residential energy credits;  
Postponed gain from sale of home;  
Investment credit (part or all) taken;  
Casualty and theft losses and insurance reimbursement;  
Certain canceled debt excluded from income;  
Rebates treated as adjustments to the sales price;  
Easements;  
Gas-guzzler tax;  
Adoption tax benefits; and  
Credit for employer-provided child care.  
Source: adjusted basis section of Pub. 551.
   
   

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