1. What Is Adjusted Basis?

Adjusted basis refers to the total cost of a property including purchase price plus improvements, minus any depreciation taken. It represents the property's value for tax purposes when calculating capital gains or losses upon sale.

2. How Does The Calculator Work?

The calculator uses the adjusted basis formula:

Where:

• \( \text{Purchase Price} \) — Original cost to acquire the property
• \( \text{Improvements} \) — Capital improvements that add value to the property
• \( \text{Depreciation} \) — Depreciation deductions taken over time

Explanation: The adjusted basis accounts for changes in the property's value due to improvements and depreciation, providing an accurate cost basis for tax calculations.

3. Importance Of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is crucial for determining capital gains tax liability when selling a property, calculating depreciation recapture, and making informed financial decisions about property investments.

4. Using The Calculator

Tips: Enter purchase price in dollars, improvements in dollars, and depreciation in dollars. All values must be non-negative numbers. Improvements should include only capital improvements, not routine maintenance.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as an improvement?
A: Capital improvements that add value to the property, extend its life, or adapt it to new uses. Examples include room additions, roof replacement, kitchen remodeling, and new HVAC systems.

Q2: How is depreciation calculated?
A: For residential rental property, depreciation is typically calculated over 27.5 years using the straight-line method. Commercial property uses 39 years.

Q3: What's the difference between basis and adjusted basis?
A: Basis is the original cost, while adjusted basis includes improvements and subtracts depreciation taken over time.

Q4: When do I need to know my adjusted basis?
A: When selling the property, calculating rental property losses, determining depreciation recapture, or making tax-deductible donations of property.

Q5: Are closing costs included in purchase price?
A: Yes, closing costs and other acquisition expenses are typically added to the purchase price to determine the initial basis.