In
tax accounting
U.S. tax accounting refers to accounting for tax purposes in the United States. Unlike most countries, the United States has a comprehensive set of accounting principles for tax purposes, prescribed by tax law, which are separate and distinct fro ...
, adjusted basis is the net cost of an asset after adjusting for various tax-related items.
Adjusted Basis or Adjusted Tax Basis refers to the original cost or other basis of
property
Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...
, reduced by
depreciation
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
deductions and increased by capital expenditures.
Example: Brad buys a lot for $100,000. He then erects a retail facility for $600,000, then depreciates the improvements for tax purposes at the rate of $15,000 per year. After three years his adjusted tax basis is $655,000
100,000 + $600,000 - (3 x $15,000)
Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes. The Amount Realized – Adjusted Basis tells the amount of Realized Gain (if positive) or Realized Loss (if negative).
Statutory definition
Section 1012 of the Internal Revenue Code defines “basis” as a taxpayer’s cost in acquiring property, except as provided in Sections 1001-1092. Section 1016 then lists 27 adjustments to this basis. Generally, improvements to property increase basis while depreciation deductions decrease it.
Calculation
Adjusted basis is calculated by beginning with an
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
's original cost basis, and then making adjustments. Adjusted basis is calculated as follows:
* Purchase costs (title & escrow fees, broker commissions, shipping, sales tax, etc.)
* Improvements (rehabilitation expenses & substantial repairs)
* Legal fees (to defend or to perfect title to the property, zoning costs, etc.)
* Selling costs (title & escrow fees, broker commissions, shipping, transfer fees, etc.)
Minus the costs represented by:
*
Accumulated depreciation
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
, depletion, or
amortization
* Casualty or theft Loss
* Other decreases to basis
Adjusted basis
Adjusted basis is crucial for calculating capital gains and ordinary gains when an
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
is sold.
A complete list of adjustments which increase or decrease basis is found in ''IRS'' Publication 551, Basis of Assets.
References
Publication 551Adjusted cost basis Calculator
Accounting in the United States
Accounting terminology
Tax terms