Basis

Basis is generally the original cost of an asset, including purchase price and associated costs (like sales tax, installation fees, or legal fees). It can be adjusted over time for things like depreciation, improvements, or casualty losses.

Types of Basis

1. Cost Basis
   • The most common type.
   • Example: You buy a rental property for $200,000. Your cost basis is $200,000.
2. Adjusted Basis
   • The original basis is modified by certain events.
   • Example: You make $20,000 in improvements to the property. Your adjusted basis becomes $220,000.
3. Basis in Inherited Property
   • Usually, the fair market value (FMV) at the date of the decedent’s death.
   • Example: You inherit stock worth $50,000. Your basis is $50,000, regardless of what the decedent paid.
4. Basis in Gifted Property
   • Generally, the donor’s basis, unless FMV is lower at the time of the gift and the recipient sells at a loss.
   • Example: Your aunt gifts you a car she bought for $10,000, now worth $7,000. Your basis depends on whether you sell it for a gain or a loss.

Why Basis Matters

• It determines capital gain or loss when you sell an asset:
  • Gain = Sale Price − Adjusted Basis
  • Loss = Adjusted Basis − Sale Price

🔄 Adjustments to Basis: What Can Change It

1. Improvements (Increase Basis)

• Definition: Capital improvements that add value, prolong life, or adapt the property to new uses.
• Example: You add a new roof to your rental property costing $15,000.
  • Change: Add $15,000 to your basis.

2. Depreciation (Decrease Basis)

• Definition: Annual deduction for wear and tear on business or income-producing property.
• Example: You depreciate your rental property by $5,000 per year for 3 years.
  • Change: Subtract $15,000 from your basis.

3. Casualty Losses (Decrease Basis)

1. Definition: Losses from fire, theft, or natural disasters that are not reimbursed by insurance.
2. Example: A fire causes $10,000 in uninsured damage to your property.
   • Change: Subtract $10,000 from your basis.

4. Rebates or Credits (Decrease Basis)

• Definition: If you receive a rebate or tax credit related to the purchase.
• Example: You buy solar panels for $20,000 and receive a $6,000 federal tax credit.
  • Change: Subtract $6,000 from your basis, making it $14,000.

5. Assessments for Local Improvements (Increase Basis)

• Definition: Charges for improvements like sidewalks or sewer lines that benefit your property.
• Example: You pay a $2,000 city assessment for a new sidewalk.
  • Change: Add $2,000 to your basis.

6. Selling Costs (Decrease Gain, Not Basis)

• Note: Costs like commissions or legal fees don’t change basis but reduce gain on sale.
• Example: You sell a property for $300,000 and pay $15,000 in commissions.
  • Change: You report a gain based on $285,000 net proceeds.

7. Gifted Property (Carryover Basis or Dual Basis)

• Definition: Basis depends on donor’s basis and FMV at time of gift.
• Example: Donor’s basis is $50,000, FMV is $40,000.
  • If sold for gain, use $50,000.
  • If sold for a loss, use $40,000.

8. Inherited Property (Step-Up Basis)

• Definition: Basis is FMV at date of death.
• Example: You inherit stock worth $100,000 (originally bought for $30,000).
  • Change: Your basis is $100,000.