What is Basis?

Your basis in property is a specific value assigned to property at various points in time. It's important to know your basis because it is used in determining your periodic depreciation deduction for the property, and in computing gain or loss when the property is disposed of.

The initial value assigned to property when you first acquire it is referred to as its unadjusted basis (your original cost). Subsequent increases and decreases in the initial value of the property, due to, for example, depreciation deductions and capital improvements, result in what is called the property's adjusted basis.

To figure gain or loss on the sale of property, compare the adjusted basis to the amount realized (the total value you receive) from the sale.

Unadjusted basis includes:

  • Your cash cost, plus
  • The value of any property, plus
  • Any liability you assumed, plus
  • Purchase expenses. For example, if you buy real estate, commissions, title insurance, recording fees, survey costs, and transfer taxes.

Example:

You paid $200,000 in cash for a building and assumed a $50,000 mortgage.

  • Your unadjusted basis is $250,000.

Adjusted Basis

Your unadjusted basis is your starting point for finding your adjusted basis.

The following items affect basis:

  • Depreciation, which reduces basis, and
  • Capital improvements, which increase basis.

Example:

You buy a car that you intend to use for business.

  • You paid $10,000 in cash for the car.
  • You have claimed depreciation of $4,000 over the first two years.
  • After the second year, you replace the engine, at a cost of $3,000 (a capital improvement).

Your adjusted basis if $9,000, figured as follows:

Unadjusted basis $10,000, less $4,000 in depreciation claimed, plus $3,000 paid for the new engine.

Basis of Inherited Property

Your basis in property you inherit is its FAIR MARKET VALUE on the DATE OF THE DECEDENT'S DEATH or alternate valuation date after the date of death, if the executor elects to us this date, regardless of when you actually acquired the property.

By law, inherited property automatically gets a holding period of more than one year.

If you sell inherited property, you report the transaction on Schedule D to report gain or loss. The word INHERITED is entered in column (b) as the date of acquisition.

The advantage of leaving appreciated property to an heir is that, the heir's basis for the inherited property is the fair market value at the decedent's death. As a result, income tax on the appreciation in value during the decedent's life is completely avoided.

For example, if the market value of the property went from $20,000 to $30,000 while the decedent owned the property, the $10,000 increase in value is tax free to you, as the heir.

Your basis would be the fair market value of $30,000, the value at the date of death of the decedent (or alternate valuation date, if this was elected).

If you were to sell the property for $30,000, you would have no gain or loss (proceeds $30,000 minus your basis of $30,000).

If you sold the property for $35,000, you would have a long-term gain of $5,000 ($35,000 minus your basis of $30,000).

If you sold the property for $25,000 you would have a capital loss of $5,000 ($25,000 minus your basis of 30,000).


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