1. What Is Real Estate Cost Basis?

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

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 claimed.

3. Importance Of Cost Basis Calculation

Details: Accurate cost basis calculation is essential for determining capital gains tax liability when selling investment 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, and total depreciation taken. All values must be in dollars and non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as an improvement?
A: Improvements are additions or renovations that add value to the property, prolong its life, or adapt it to new uses (e.g., new roof, kitchen remodel, room addition).

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: Does land value affect cost basis?
A: Land is not depreciable, so only the building value should be included in depreciation calculations, but the full purchase price including land is part of the initial cost basis.

Q4: What about closing costs?
A: Certain closing costs and settlement fees can be added to the cost basis, including title insurance, legal fees, and recording fees.

Q5: How does cost basis affect taxes when selling?
A: When you sell, your taxable gain is calculated as: Sale Price - Selling Expenses - Cost Basis. A higher cost basis means lower taxable gain.