1. What is Home Cost Basis?

Cost basis refers to the original value of a property for tax purposes, usually the purchase price plus improvements and minus depreciation. It is used to determine capital gains when the property is sold.

2. How Does the Calculator Work?

The calculator uses the cost basis formula:

Where:

• \( CB \) — Cost Basis ($)
• \( PP \) — Purchase Price ($)
• \( Imp \) — Improvements ($)
• \( Dep \) — Depreciation ($)

Explanation: The formula calculates the adjusted cost basis by adding capital improvements to the original purchase price and subtracting any depreciation taken.

3. Importance of Cost Basis Calculation

Details: Accurate cost basis calculation is crucial for determining capital gains tax liability when selling a property. A higher cost basis results in lower taxable gains.

4. Using the Calculator

Tips: Enter the original purchase price, total cost of improvements made to the property, and total depreciation taken. All values must be in dollars and non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as a home improvement?
A: Capital improvements that add value to the home, prolong its life, or adapt it to new uses (e.g., room additions, roof replacement, kitchen remodel).

Q2: How is depreciation calculated?
A: For rental properties, depreciation is typically calculated over 27.5 years using the straight-line method. Personal residences generally don't depreciate for tax purposes.

Q3: Can I include closing costs in my cost basis?
A: Yes, certain closing costs can be added to your cost basis, including legal fees, title insurance, and recording fees.

Q4: How does cost basis affect my taxes when I sell?
A: Your taxable gain is calculated as Sale Price minus Selling Expenses minus Cost Basis. A higher cost basis means lower taxable gain.

Q5: Should I keep records of improvements?
A: Yes, maintain detailed records of all improvements including receipts, contracts, and before/after photos to substantiate your cost basis.