Determining Your Property's Basis

My last post was about selling your main home, and I touched briefly on your property's basis and cost basis for tax purposes. In this article I will write a little more in-depth on these subjects.

Basis

You must determine the property's basis before the calculations required for tax purposes can be made, such as when you buy or sell a home or rental property.

Usually a gain or loss is realized when you sell your home. If the amount received is more than the adjusted basis, then there is a gain. Otherwise, there is a loss. Your gain or loss is usually a recognized gain or loss for tax purposes. Recognized gains are included in gross income, and recognized gains are deductible from gross income.

Basis is the amount of your investment in property for tax purposes. Basis is defined by how it is calculated: cost basis, adjusted basis, and basis other than cost. Your original purchase price of the property is you cost basis. The cost basis is increased or decreased by certain events to arrive at the adjusted basis. For example, any improvements you make to your property will increase its basis. Improvements are defined as increasing the value of the property, lengthening the property's life, and adapt the property to different use. Deductions for depreciation or casualty losses will decrease the basis. If you did not buy the property, the basis is calculated with a different method.

Cost Basis

Usually, the basis of the property is its cost. The cost is the amount you paid in cash, other property, services, or debt obligations. Cost may also include freight, sales tax, excise taxes, installation and testing, legal and accounting fees, and revenue stamps.

Some fees or closing costs can be included in the basis. These include abstract fees, charges for installing utility services, legal fees, recording fees, surveys, transfer taxes, and owners title insurance. Any amounts the seller owes that the buyer agrees to pay, such as back taxes or interest, mortgage fees, sales commissions, and charges for improvements or repairs can also be included in the basis.

Fees that cannot be included in the basis include casualty insurance premiums, fees for refinancing a mortgage, rent for occupancy of the building before closing, and charges for utilities or other services related to the occupancy before closing. Charges connected with getting a loan, points, loan origination fees, mortgage insurance premiums, cost of a credit report, loan assumption fees and appraisal fees are also not added to the basis.


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Tim Watson is a tax preparer during the season who also runs an SEO directory and an iPod directory. You may use this article as is provided the resource box stays intact.