1. What Is Adjusted Basis?

Adjusted Basis (AB) represents the total investment in a rental property for tax purposes. It includes the original purchase price plus capital improvements, minus accumulated depreciation. This figure is crucial for calculating capital gains when selling the property.

2. How Does The Calculator Work?

The calculator uses the adjusted basis formula:

Where:

• \( Cost \) — Original purchase price of the property
• \( Improvements \) — Cost of capital improvements made to the property
• \( Depreciation \) — Total depreciation claimed on the property

Explanation: The adjusted basis reflects your actual investment in the property after accounting for depreciation deductions taken over the ownership period.

3. Importance Of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is essential for determining taxable gain or loss when selling rental property, ensuring proper tax reporting, and maximizing investment returns.

4. Using The Calculator

Tips: Enter all amounts in dollars. Cost represents the original purchase price, improvements include major renovations and additions, and depreciation is the total depreciation claimed over the ownership period.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as a capital improvement?
A: Capital improvements are additions or renovations that increase property value, extend useful life, or adapt it to new uses (e.g., new roof, room additions, major renovations).

Q2: How is depreciation calculated?
A: Residential rental property is typically depreciated over 27.5 years using the straight-line method, based on the building's value (excluding land).

Q3: Why is adjusted basis important for taxes?
A: Adjusted basis determines your taxable gain when selling: Selling Price - Adjusted Basis = Taxable Gain. A higher adjusted basis means lower taxable gain.

Q4: Can adjusted basis be negative?
A: No, adjusted basis cannot be negative. If depreciation exceeds cost plus improvements, the adjusted basis is zero.

Q5: What's the difference between adjusted basis and cost basis?
A: Cost basis is the original purchase price, while adjusted basis includes improvements and subtracts depreciation taken over time.