Calculating Adjusted Basis On Rental Property

Adjusted Basis Formula:

\[ \text{Adjusted Basis} = \text{Purchase Price} + \text{Improvements} - \text{Depreciation} \]

Adjusted Basis:

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1. What Is Adjusted Basis?

Adjusted basis refers to the original cost or other basis of property, adjusted for various events during the period of ownership. For rental properties, it's used to determine depreciation, gain, or loss when the property is sold.

2. How Does The Calculator Work?

The calculator uses the adjusted basis formula:

\[ \text{Adjusted Basis} = \text{Purchase Price} + \text{Improvements} - \text{Depreciation} \]

Where:

\( \text{Purchase Price} \) — Original cost of acquiring the rental property
\( \text{Improvements} \) — Capital improvements made to the property
\( \text{Depreciation} \) — Total depreciation claimed on the property

Explanation: The adjusted basis represents the property's current value for tax purposes after accounting for capital investments and depreciation deductions.

3. Importance Of Adjusted Basis Calculation

Details: Calculating adjusted basis is crucial for determining capital gains tax when selling rental property, calculating depreciation recapture, and establishing the property's current tax value.

4. Using The Calculator

Tips: Enter the original purchase price, total cost of improvements, and total depreciation taken. All values must be in dollars and non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as an improvement?
A: Improvements are capital expenditures that add value to the property, prolong its life, or adapt it to new uses (e.g., new roof, room additions, major renovations).

Q2: How is depreciation calculated?
A: Residential rental property is typically depreciated over 27.5 years using the straight-line method, starting when the property is placed in service.

Q3: What's the difference between repairs and improvements?
A: Repairs maintain the property's current condition and are expensed immediately, while improvements enhance the property and are capitalized as part of the basis.

Q4: When is adjusted basis used?
A: Primarily used when calculating gain or loss on sale, determining depreciation recapture, and for inheritance and gift tax purposes.

Q5: Can adjusted basis be negative?
A: No, adjusted basis cannot be negative. If depreciation exceeds purchase price plus improvements, consult a tax professional as this indicates an error.