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Adjusted basis refers to the original value or cost of an asset, modified by certain events such as improvements, depreciation, or damages. It plays a crucial role in calculating the taxable gain or loss when the asset is sold. For instance, if you purchase a property and later make significant improvements, these enhancements increase your adjusted basis. Conversely, depreciation or damage can lower it. By understanding adjusted basis, you can better plan your tax obligations and investment strategies.
Key Features of Adjusted Basis:
- Initial Basis: Typically the purchase price of the asset.
- Adjustments: Includes costs of improvements, depreciation, and expenses of sale.
- Tax Impact: Affects the calculation of capital gains or losses.
How to Calculate Adjusted Basis:
Start with the original purchase price, then add improvements and subtract depreciation or damages. Keeping thorough records is essential for accurate calculations and ensuring compliance with tax regulations.
Frequently Asked Questions: Adjusted Basis
What is the difference between basis and adjusted basis?
Basis is the original cost of the asset, while adjusted basis accounts for changes such as improvements or depreciation.
How does depreciation affect adjusted basis?
Depreciation reduces the adjusted basis, which can increase the taxable gain upon sale.
Do repairs affect adjusted basis?
No, only improvements that increase the asset’s value or prolong its useful life adjust the basis.
What happens to the adjusted basis of an inherited asset?
Inherited assets typically receive a “step-up” in basis to their fair market value at the date of the decedent’s death.
Can adjusted basis be negative?
No, adjusted basis cannot fall below zero.
How do I prove my adjusted basis to the IRS?
Keep records of the purchase price, improvement costs, and any depreciation.
