1. What Is Cost Basis?

Cost basis represents the total amount invested 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 selling a property.

2. How Does The Calculator Work?

The calculator uses the standard cost basis formula:

Where:

• \( Purchase\ Price \) — Original purchase price of the home
• \( Capital\ Improvements \) — Permanent improvements that add value to the property
• \( Depreciation \) — Accumulated depreciation claimed on the property

Explanation: This calculation determines the adjusted basis of your home, which is used to calculate taxable gain or loss when you sell the property.

3. Importance Of Cost Basis Calculation

Details: Accurate cost basis calculation is essential for tax reporting when selling real estate. It helps determine capital gains tax liability and ensures proper tax compliance.

4. Using The Calculator

Tips: Enter all amounts in USD. Include all capital improvements such as renovations, additions, and major upgrades. Depreciation should reflect the total depreciation claimed over the ownership period.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as a capital improvement?
A: Capital improvements are permanent additions that increase property value, such as room additions, kitchen remodels, roof replacement, or installing a new HVAC system.

Q2: How is depreciation calculated?
A: For rental properties, depreciation is typically calculated over 27.5 years for residential property using the straight-line method.

Q3: Does cost basis include closing costs?
A: Yes, certain closing costs and settlement fees can be added to your cost basis when initially purchasing the property.

Q4: What happens if I don't know the exact depreciation?
A: You should consult your tax records or a tax professional. Underestimating depreciation can result in incorrect cost basis and potential tax issues.

Q5: Is cost basis the same for primary residence and rental property?
A: The calculation method is similar, but rental properties typically have more depreciation, and primary residences may qualify for capital gains exclusions.