How Do I Calculate Adjusted Basis Of Home Sold

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 represents the total cost of a property for tax purposes, including the original purchase price plus improvements, minus any depreciation taken. It is used to determine capital gains or losses when selling a property.

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 to acquire the property
\( \text{Improvements} \) — Capital improvements made to the property
\( \text{Depreciation} \) — Depreciation claimed on the property

Explanation: This calculation adjusts the original cost basis to reflect changes in the property's value due to improvements and depreciation over time.

3. Importance Of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is crucial for determining taxable capital gains when selling a property. It helps minimize tax liability by properly accounting for all allowable costs and deductions.

4. Using The Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as an improvement?
A: Improvements are permanent additions that increase property value, such as room additions, kitchen renovations, or new roofing. Routine maintenance does not qualify.

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: What if I inherited the property?
A: For inherited property, the basis is usually the fair market value at the time of the previous owner's death (stepped-up basis).

Q4: Are closing costs included in purchase price?
A: Yes, certain closing costs like legal fees, title insurance, and recording fees can be added to the purchase price to increase your basis.

Q5: How does adjusted basis affect capital gains tax?
A: Capital gain = Selling price - Adjusted basis - Selling expenses. A higher adjusted basis results in lower taxable capital gains.