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Basis Calculation Formula:
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Basis calculation determines the adjusted cost basis of a home for capital gains tax purposes when selling. It represents the total investment in the property that can be used to reduce taxable gain.
The calculator uses the basis calculation formula:
Where:
Explanation: The basis starts with the original purchase price, increases with qualified improvements, and decreases by any depreciation claimed over the ownership period.
Details: Accurate basis calculation is crucial for determining capital gains tax liability when selling a home. A higher basis reduces taxable gain, potentially lowering tax burden significantly.
Tips: Enter purchase price and improvements in dollars, include all capital improvements like renovations, additions, and major upgrades. Include depreciation only if the property was used for business or rental purposes.
Q1: What qualifies as improvements?
A: Capital improvements that add value to the home, prolong its life, or adapt it to new uses (e.g., room additions, kitchen remodel, new roof).
Q2: What doesn't count as improvements?
A: Routine repairs and maintenance (painting, fixing leaks), homeowners insurance, and utilities do not increase basis.
Q3: How does depreciation affect basis?
A: Depreciation reduces your basis and may result in depreciation recapture tax when you sell, even if you have no overall gain.
Q4: Are there capital gains exclusions?
A: Yes, up to $250,000 ($500,000 for married couples) of gain may be excluded if you meet ownership and use tests.
Q5: Should I keep improvement records?
A: Absolutely. Keep receipts and documentation for all improvements as they increase your basis and reduce taxable gain.