Posted by The TaxAdvocate Group, LLC

Breakdown of Calculating Cost Basis For Real Estate

Breakdown of Calculating Cost Basis For Real Estate

The tax base of your real estate is the one that you paid for the property and all its improvements and is generally different from the purchase price of the property. The property tax base often comes into play when a person sells it because the capital gains tax is calculated based on the difference between the tax base and the final selling price. However, investors must pay attention to the base of a property for all of their property because depreciation is calculated based on taxation.

The adjusted basis for an activity is its cost after it has been changed for different tax issues. In general, it's because the higher your assets, the less capital you realize when you sell it. Of course, this can work and vice versa. Just as some adjustments can increase your base on one asset, others reduce it, which is usually not a good thing for taxes. You will pay the capital gains tax, or you will incur a capital loss based on the contrast between the adjusted base and the amount for which you sell the asset.

How to calculate the adjusted basis

The calculation of the adjusted asset base begins with the initial purchase price. From there, you can increase your basis by adding the amount you spend to improve your business, as well as the amounts you paid for legal fees or commercial expenses.

The basis decreases if it is necessary to deduct amounts previously claimed as tax deductions such as depreciation, theft losses, or casualty losses.

Here is an example

Suppose you are selling properties in which you have not lived long enough to qualify for the capital gains tax exemption. Your basis would be the sum of money initially paid for the property. You can add to this the cost of any capital increase, as well as agent fees and other sales charges.

But you're not done yet. If the tax returns contain property depreciated because they were held, it is possible to recover these deductions effectively, subtracting them from the base after adding the costs as mentioned above.

Below you will find the main components of the necessary calculations, in addition to the elements that can be added to obtain a narrow and subtractive basis.

Cost basis

The basis of the property you buy is usually its cost. The cost is the amount to be paid in cash, debt securities, other goods, or services. The price also includes the amounts paid for the following items:

  • Sales tax
  • Shipping
  • Installation and testing
  • Excise taxes
  • Legal and accounting fees when they need to be capitalized
  • Revenue stamp
  • Recording fees
  • Real estate taxes if taken by the seller


Increase to basis

Increase the basis of any property of all items added correctly to a capital account. This includes the cost of any improvements that should last more than a year.

Also, rehabilitation costs increase the basis, but it is necessary to subtract all authorized rehabilitation credits for these expenses before adding them to the basis. If you need to recover some of the credit, increase the amount recovered.

If you make additions or enhancements to your business properties, keep separate accounts for them. Also, each basis must be amortized based on the depreciation rules that would apply to the underlying building if it were put into service simultaneously with the addition or improvement of the service. For more information, see publication 946.

The following items increase the base of the property:

  • The cost of extending utility lines to the property
  • Impact rate
  • Legal fees, such as the cost of defense and the completion of the title
  • Legal expenses related to the reduction of a tax assessment for payment activities related to local improvements
  • Zoning costs
  • The capital value of a redeemable tent

Decrease to base

Here are some elements that reduce the basis of your property:

  • Deduction under section 179
  • Distributions of non-taxable companies
  • Deductions previously authorized (or allowed) for depreciation and depletion

Some loans for vehicles: 

  • Residential energy loans
  • Deferred revenue from home sales
  • Investment credit (partially or totally) received
  • Loss of accidents, theft, and insurance refunds
  • Certain adjustments to the canceled debt at the selling price
  • Discounts treated as sales price adjustments
  • Servitude
  • Rate of gas consumption
  • Tax benefits of adoption
  • Child loan granted by the employer

The IRS examines in detail the basis and the correct basis in publication 551, Asset Base.

Note: Always confer with a tax professional for the latest information and trends. Tax laws and regulations may change from time to time. This article is not a tax opinion and is not intended to be a tax opinion. 

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