1. What Is Cost Basis?

Cost basis represents the total investment in a rental property for tax purposes. It includes the original purchase price plus any capital improvements, minus accumulated depreciation.

2. How Does The Calculator Work?

The calculator uses the cost basis formula:

Where:

• \( Purchase\ Price \) — Original cost to acquire the property
• \( Improvements \) — Capital improvements that add value or extend life
• \( Depreciation \) — Accumulated depreciation claimed over time

Explanation: This calculation determines the adjusted basis used for calculating capital gains when selling the property.

3. Importance Of Cost Basis Calculation

Details: Accurate cost basis is essential for determining taxable gain or loss upon sale, calculating depreciation recapture, and proper tax reporting to the IRS.

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.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as a capital improvement?
A: Improvements that add value, adapt to new uses, or extend useful life (roof replacement, room additions, major renovations).

Q2: How is depreciation calculated?
A: Residential rental property is 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 enhance value (added to basis).

Q4: When do I need to know my cost basis?
A: When selling the property, calculating rental losses, or determining depreciation recapture tax.

Q5: Can cost basis decrease over time?
A: Yes, through depreciation deductions, but it can increase through capital improvements.