1. What Is Adjusted Cost Basis?

Adjusted cost basis represents the total capital investment 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 tax when selling real estate.

2. How Does The Calculator Work?

The calculator uses the adjusted basis formula:

Where:

• Purchase Price — Original cost of acquiring the property
• Improvements — Capital improvements that add value or extend useful life
• Depreciation — Accumulated depreciation claimed on the property

Explanation: This calculation adjusts the original cost basis to reflect the true investment in the property after accounting for improvements made and depreciation taken over time.

3. Importance Of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is essential for determining capital gains tax liability when selling property. A higher adjusted basis results in lower taxable gain, potentially reducing tax burden significantly.

4. Using The Calculator

Tips: Enter all amounts in dollars. Include only capital improvements (not repairs), and use the total accumulated depreciation from all tax years. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as a capital improvement?
A: Capital improvements add value to the property, adapt it to new uses, or extend its life. Examples include room additions, new roofing, kitchen renovations, and permanent landscaping.

Q2: How is depreciation calculated?
A: Residential rental property is typically depreciated over 27.5 years using the straight-line method. Commercial property uses 39 years.

Q3: What's the difference between repairs and improvements?
A: Repairs maintain current condition and are expensed immediately. Improvements enhance value and are capitalized, adding to basis.

Q4: When is adjusted basis used?
A: Primarily when calculating capital gains tax upon sale: Selling Price - Adjusted Basis = Capital Gain.

Q5: Can adjusted basis be negative?
A: No, adjusted basis cannot be negative. If depreciation exceeds purchase price plus improvements, the basis is zero.