Adjusted basis
In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items.[1]
Adjusted Basis or Adjusted Tax Basis refers to the original cost or other basis of property, reduced by depreciation deductions and increased by capital expenditures.
Example: Michael buys a lot for $100,000. He then erects a retail facility for $600,000, then depreciates the improvements for tax purposes at the rate of $15,000 per year. After three years his adjusted tax basis is $655,000 = $100,000 + $600,000 - (3 x $15,000).
Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes. The Amount Realized – Adjusted Basis tells the amount of Realized Gain (if positive) or Realized Loss (if negative).
Statutory definition
[edit]Section 1012 of the Internal Revenue Code defines “basis” as a taxpayer's cost in acquiring property, except as provided in Sections 1001–1092.[2][3][4] There is also an exception or "Special rule" under section 1012 (b) for "apportioned real estate taxes."[3]
Section 1016 then lists 27 adjustments to this basis.[5] Generally, improvements to property increase basis while depreciation deductions decrease it.
Calculation
[edit]Adjusted basis is calculated by beginning with an asset's original cost basis, and then making adjustments. Adjusted basis is calculated as follows:
- Purchase costs (title & escrow fees, broker commissions, shipping, sales tax, etc.)
- Improvements (rehabilitation expenses & substantial repairs)
- Legal fees (to defend or to perfect title to the property, zoning costs, etc.)
- Selling costs (title & escrow fees, broker commissions, shipping, transfer fees, etc.)
Minus the costs represented by:
- Accumulated depreciation, depletion, or amortization
- Casualty or theft Loss
- Other decreases to basis
Adjusted basis
[edit]Adjusted basis is crucial for calculating capital gains and ordinary gains when an asset is sold.
A complete list of adjustments which increase or decrease basis is found in IRS Publication 551, Basis of Assets.[6]
References
[edit]- ^ Bragg, Steven (2023-06-01). "Adjusted basis definition". AccountingTools. Retrieved 2023-07-26.
- ^ "Section 1012 - Basis of Cost - Generally" (pdf). United States government website. October 4, 2024. Retrieved March 12, 2025.
- ^ a b "26 U.S. Code § 1012 - Basis of property—cost". Cornell Law School, Legal Information Institute. December 19, 2014. Retrieved March 12, 2025.
- ^ "Section 1012 - Basis of property-cost: 18 Analyses of this statute by attorneys". Thompson-Reuters. February 8, 2024. Retrieved March 12, 2025.
- ^ "26 U.S. Code § 1016 - Adjustments to basis". Cornell Law School, Legal Information Institute. August 12, 2022. Retrieved March 12, 2025.
- ^ "About Publication 551, Basis of Assets". IRS official government website. May 22, 2024. Retrieved March 12, 2025.