Calculating the Basis for the IRS

The US has a notoriously complex taxation system that requires a real estate investor to calculate their basis in investment property when reporting a gain or loss on a tax return. The IRS determines your monetary gain or less when you sell the property by comparing the sale price to the adjusted basis in the property. But how can you determine this number?

The original basis for a property is determined by the way the property was acquired, whether it be through a purchase, in trade, or received as a gift or inheritance. For a purchased property, it is simply the total cost of purchase minus certain adjustments, such as depreciation or additions. These can include capital improvements or property additions like an added room.

The adjusted basis is the sum of the purchase price and any additions or deductions that have been made. For example, if you added a new room at a cost of $20,000 for a house purchased for $100,000, then your new basis is $120,000. And if you later added a new roof at a cost of $5,000 then the basis would then be $125,000. There are three types of basis that you may need to consider:

1. The basis of land include the purchase price plus legal and recording fees, abstract fees, survey costs, and payments for non-depreciable permanent improvements.
2. The basis of purchased property is the purchase price plus other expenses such as installation of upgrades, option premiums paid, and other expenses of purchasing the property.
3. The adjusted basis is used when the property is sold and takes into account increases or decreases in value of the property during the period you owned it. Any improvements or added value come in as an addition to the basis.

In the end, calculating the adjusted basis for your property can be a difficult process that may be best left to an accountant with real estate experience.

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