Adjusted basis
Encyclopedia
In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items.
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).
's original cost basis, and then making adjustments. Adjusted basis is calculated as follows:
Minus the costs represented by:
is sold.
A complete list of adjustments which increase or decrease basis is found in IRS Publication 551, Basis of Assets.
The adjusted basis for tax purposes are different than for financial accounting (GAAP) gains or losses on sales of capital assets.
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
Section 1012 of the Internal Revenue Code defines “basis” as a taxpayer’s cost in acquiring property, except as provided in Sections 1001-1092. Section 1016 then lists 27 adjustments to this basis. Generally, improvements to property increase basis while depreciation deductions decrease it.Calculation
Adjusted basis is calculated by beginning with an assetAsset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered 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 amortizationAmortizationAmortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...
- Casualty or theft Loss
- Other decreases to basis
Adjusted basis
Adjusted basis is crucial for calculating capital gains and ordinary gains when an assetAsset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
is sold.
A complete list of adjustments which increase or decrease basis is found in IRS Publication 551, Basis of Assets.
The adjusted basis for tax purposes are different than for financial accounting (GAAP) gains or losses on sales of capital assets.