Statutory definitionSection 1012 of the Internal Revenue Code defines “basis” as a taxpayer’s cost in acquiring property, except as provided in Sections 1001-1092. Section 1016 then lists 27 adjustments to this basis. Generally, improvements to property increase basis while depreciation deductions decrease it.
CalculationAdjusted basis is calculated by beginning with an asset's original cost basis, and then making adjustments. Adjusted basis is calculated as follows: * Purchase costs (title & escrow fees, broker commissions, shipping, sales tax, etc.) * Improvements (rehabilitation expenses & substantial repairs) * Legal fees (to defend or to perfect title to the property, zoning costs, etc.) * Selling costs (title & escrow fees, broker commissions, shipping, transfer fees, etc.) Minus the costs represented by: * Accumulated Depreciation, Accumulated depreciation, depletion, or amortization * Casualty or theft Loss * Other decreases to basis
Adjusted basisAdjusted basis is crucial for calculating capital gains and ordinary gains when an asset is sold. A complete list of adjustments which increase or decrease basis is found in ''IRS'' Publication 551, Basis of Assets.