1. What is Real Estate Cost Basis?

The cost basis of a property is the original value of an asset for tax purposes, usually the purchase price, adjusted for improvements, closing costs, and other expenditures. It's used to calculate capital gains or losses 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 ($)
• \( CC \) — Closing Costs ($)
• \( Imp \) — Capital Improvements ($)

Explanation: The cost basis represents your total investment in the property, which is used to determine taxable gain or loss when you sell.

3. Importance of Cost Basis Calculation

Details: Accurate cost basis calculation is crucial for determining capital gains tax liability when selling real estate. A higher cost basis reduces taxable gain, potentially lowering your tax burden.

4. Using the Calculator

Tips: Enter the original purchase price, all closing costs associated with the purchase, and the total cost of any capital improvements made to the property. All values must be in dollars.

5. Frequently Asked Questions (FAQ)

Q1: What expenses qualify as closing costs?
A: Typical closing costs include title insurance, attorney fees, recording fees, transfer taxes, and loan origination fees.

Q2: What counts as a capital improvement?
A: Improvements that add value to the property, prolong its life, or adapt it to new uses, such as roof replacement, kitchen remodel, or adding a bathroom.

Q3: Are repairs considered improvements?
A: Routine repairs and maintenance are not considered capital improvements and cannot be added to your cost basis.

Q4: How does cost basis affect my taxes?
A: When you sell, your taxable gain is calculated as: Sale Price - Selling Expenses - Cost Basis = Taxable Gain.

Q5: Should I keep records of improvements?
A: Yes, maintain detailed records and receipts for all improvements as they increase your cost basis and reduce taxable gain when you sell.