1. What is Adjusted Basis of Rental Property?

The adjusted basis of rental property represents the property's cost basis after accounting for depreciation and capital improvements. It is used to determine capital gains or losses when the property is sold and is essential for accurate tax reporting.

2. How Does the Calculator Work?

The calculator uses the adjusted basis formula:

Where:

• \( \text{Original Cost} \) — Initial purchase price of the property including closing costs
• \( \text{Depreciation} \) — Total depreciation claimed over the ownership period
• \( \text{Improvements} \) — Cost of capital improvements made to the property

Explanation: The formula adjusts the original cost basis by subtracting depreciation (which reduces basis) and adding improvements (which increase basis) to arrive at the current tax basis.

3. Importance of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is crucial for determining taxable gain or loss upon sale of rental property, ensuring proper tax compliance, and maximizing tax efficiency in real estate investments.

4. Using the Calculator

Tips: Enter the original purchase cost, total depreciation claimed, and cost of improvements in dollars. All values must be non-negative numbers. The calculator will compute the adjusted basis instantly.

5. Frequently Asked Questions (FAQ)

Q1: What is included in original cost?
A: Original cost includes purchase price plus closing costs, legal fees, title insurance, and other acquisition expenses that are capitalized rather than expensed.

Q2: What qualifies as improvements?
A: Capital improvements that add value to the property, prolong its life, or adapt it to new uses, such as roof replacement, kitchen renovation, or adding a room.

Q3: How is depreciation calculated?
A: Residential rental property is depreciated over 27.5 years using the straight-line method, while commercial property uses 39 years.

Q4: Why is adjusted basis important for taxes?
A: Adjusted basis determines the taxable gain when selling: Selling Price - Adjusted Basis = Taxable Gain. A higher adjusted basis means lower taxable gain.

Q5: Can repairs be included in improvements?
A: No, routine repairs and maintenance are expensed in the year incurred, while improvements are capitalized and added to the property's basis.