What Can Be Included In The Cost Basis Of A Property?
It’s important to consider your cost basis and how it’s computed as you contemplate a potential sale of your property and how much money you might receive from it. Your cost basis typically includes:
- The original investment you made in the property minus the value of the land on which it sits
- Certain items like legal, abstract or recording fees incurred in connection with the property
- Any seller debts that a buyer agrees to pay
Adjusted Cost Basis In Real Estate
Your cost basis doesn’t necessarily remain static, especially as time passes. If it changes, it becomes referred to as your adjusted cost basis.
Your adjusted basis is a figure that takes additional factors into account when computing your capital investment in a property for tax purposes – factors that can add to or subtract from your original cost basis.
Note that this amount can vary depending on how any money relating to your property is spent (like improvements to the property, repairs for damages, etc.) and may also be impacted by factors such as depreciation and insurance payouts.
How To Calculate Your Adjusted Cost Basis
To calculate your adjusted basis:
- Begin by noting the cost of the original investment that you made in your property.
- Next, add in the cost of major improvements (for example, additions or upgrades).
- Then, subtract any amounts allowed via depreciation or casualty and theft losses.
Factors That Can Impact Your Cost Basis
Samples that can reduce your cost basis include:
- Depreciation
- Insurance payments received due to a casualty or theft loss
- Tax credits assigned for home energy improvements
On the flip side, factors that can increase your cost basis include:
- Additions and improvements to the home
- Money that you spend to restore property after damage or loss
- Legal fees spent that relate to the property in question
Homeowners most commonly increase their cost basis by making significant improvements to their property that increase their home’s value, boost its lifespan or enable new uses for the property. Common improvements that might increase your cost basis include (but are not limited to) bathroom or kitchen upgrades, home additions, new roofing, the addition of a fence or desk, and various landscaping enhancements.
