1. What Is Adjusted Basis in Real Estate?

Adjusted basis refers to the original cost of a property plus the cost of improvements minus any depreciation taken. It's used to determine capital gains or losses when selling real estate and is crucial for tax purposes.

2. How Does the Calculator Work?

The calculator uses the adjusted basis formula:

Where:

• \( \text{Purchase Price} \) — Original cost of the property
• \( \text{Improvements} \) — Capital improvements made to the property
• \( \text{Depreciation} \) — Depreciation claimed on the property

Explanation: The adjusted basis represents the property's true cost basis after accounting for capital investments and depreciation deductions.

3. Importance of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is essential for determining taxable gains when selling property, calculating depreciation recapture, and making informed investment decisions.

4. Using the Calculator

Tips: Enter purchase price in dollars, total cost of improvements in dollars, and total depreciation claimed in dollars. All values must be non-negative numbers.

5. Frequently Asked Questions (FAQ)

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

Q2: How is depreciation calculated for real estate?
A: Residential rental property is typically depreciated over 27.5 years using the straight-line method, while commercial property uses 39 years.

Q3: Why is adjusted basis important for taxes?
A: Adjusted basis determines your capital gain when selling: Selling Price - Adjusted Basis = Capital Gain. This affects your tax liability significantly.

Q4: Can adjusted basis be negative?
A: No, adjusted basis cannot be negative. If depreciation exceeds purchase price 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.