Calculate Adjusted Cost Basis Of Home

Adjusted Cost Basis Formula:

\[ Adjusted\ Cost\ Basis = Purchase\ Price + Improvements - Depreciation \]

Adjusted Cost Basis:

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1. What Is Adjusted Cost Basis?

Adjusted Cost Basis represents the total cost of a property including purchase price and improvements, minus any depreciation taken. It's used to determine capital gains when selling a property.

2. How Does The Calculator Work?

The calculator uses the Adjusted Cost Basis formula:

\[ Adjusted\ Cost\ Basis = Purchase\ Price + Improvements - Depreciation \]

Where:

\( Purchase\ Price \) — Original purchase price of the home
\( Improvements \) — Cost of capital improvements made to the property
\( Depreciation \) — Total depreciation claimed on the property

Explanation: This calculation adjusts the original cost basis to account for investments in the property and tax deductions taken over time.

3. Importance Of Adjusted Cost Basis

Details: Accurate adjusted cost basis is crucial for calculating capital gains tax when selling a property, determining depreciation recapture, and making informed financial decisions about property investments.

4. Using The Calculator

Tips: Enter all amounts in dollars. Include all capital improvements (renovations, additions, major repairs) and 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 or renovations that increase property value, extend useful life, or adapt it to new uses (e.g., new roof, room addition, kitchen remodel).

Q2: How is depreciation calculated for rental properties?
A: Residential rental properties are typically depreciated over 27.5 years using the straight-line method.

Q3: What's the difference between repairs and improvements?
A: Repairs maintain current condition (deductible expenses), while improvements add value (capitalized and added to basis).

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

Q5: Can adjusted cost basis be negative?
A: No, adjusted cost basis should not be negative. If depreciation exceeds purchase price plus improvements, consult a tax professional.