1. What Is Cost Basis For Property?

Cost basis represents the total investment in a property for tax purposes. It includes the original purchase price plus any capital improvements, minus accumulated depreciation. This figure is crucial for calculating capital gains when the property is sold.

2. How Does The Calculator Work?

The calculator uses the standard cost basis formula:

Where:

• Purchase Price — Original acquisition cost of the property
• Improvements — Capital improvements that add value or extend useful life
• Depreciation — Accumulated depreciation claimed on the property

Explanation: This calculation determines the adjusted basis of your property, which is used to calculate taxable gain or loss upon disposition.

3. Importance Of Cost Basis Calculation

Details: Accurate cost basis calculation is essential for tax compliance, capital gains reporting, inheritance planning, and making informed investment decisions about property sales or transfers.

4. Using The Calculator

Tips: Enter all amounts in dollars. Include only capital improvements (not routine maintenance) and use the total accumulated depreciation from all tax years. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

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

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

Q3: Does cost basis include closing costs?
A: Yes, certain closing costs at purchase can be added to basis, including legal fees, title insurance, and recording fees.

Q4: What happens to cost basis when inheriting property?
A: Inherited property generally receives a "step-up" in basis to fair market value at the date of death, eliminating built-up gains.

Q5: How does cost basis affect capital gains tax?
A: Capital gain = Sale price - Selling expenses - Cost basis. Lower cost basis results in higher taxable gain, while higher cost basis reduces taxable gain.