1. What is Adjusted Basis?

Adjusted Basis represents the total investment in a property for tax purposes. It includes the original cost basis plus any improvements made, minus any depreciation taken over time.

2. How Does the Calculator Work?

The calculator uses the Adjusted Basis formula:

Where:

• \( \text{CB} \) — Cost Basis: Original purchase price plus acquisition costs
• \( \text{Imp} \) — Improvements: Capital improvements made to the property
• \( \text{Dep} \) — Depreciation: Total depreciation claimed on the property

Explanation: This calculation determines the property's adjusted basis, which is used to calculate capital gains when the property is sold.

3. Importance of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is crucial for determining capital gains tax liability when selling a property. It helps property owners understand their true investment and potential tax obligations.

4. Using the Calculator

Tips: Enter the original cost basis, total improvements made, and total depreciation taken. All values must be in dollars and non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What constitutes a capital improvement?
A: Capital improvements are permanent additions or renovations that increase property value, prolong its useful life, or adapt it to new uses (e.g., new roof, room addition, kitchen remodel).

Q2: How is depreciation calculated?
A: For residential rental properties, depreciation is typically calculated over 27.5 years using the straight-line method. Different rules apply to commercial properties.

Q3: Can adjusted basis be negative?
A: No, adjusted basis cannot be negative. If depreciation exceeds the sum of cost basis and improvements, consult a tax professional as this may indicate an error.

Q4: When should I calculate adjusted basis?
A: Calculate adjusted basis when selling the property, gifting it, or when significant improvements are made for tax planning purposes.

Q5: Are closing costs included in cost basis?
A: Yes, certain closing costs and acquisition expenses can be added to the original purchase price to determine the initial cost basis.