The calculator for adjusted basis in real estate is not just for computing capital gains of the real estate sale but can be used for calculating capital gains on the sale or transfer of all kinds of capital assets. The term “basis” of a property is the cost of its purchase or acquisition. But the term “adjusted basis” of an asset means the cost of an asset plus any increases or decreases to its original value. The improvements to the acquired property increase its basis, while depreciation of the asset decreases it. Our calculator for adjusted basis in real estate takes into account all those tax principles for computing the final cost basis of an asset -be it real estate, share, or stock. By the way, you can test our real estate capital gains calculator also.
Table of Contents
Adjusted basis in real estate calculator
What does “cost basis” mean?
Section 1012 of the Internal Revenue Code defines the term “basis” as a taxpayer’s cost in acquiring property, except as provided in Sections 1001-1092. So, the cost basis is the original purchase price of an asset plus certain expenses and fees incurred by the buyer, many of which are detailed in the closing documents.
What increases the basis of real property?
It is common knowledge that improvement cost of a property increases the cost basis .You can get a list of 27 adjustments to the basis of property as provide by the section 1016 of 26US Code that affect adjusted basis in real estate or any other asset.
- the cost of home improvements/additions,
- rebuilding costs following a disaster,
- legal fees linked to property ownership,
- expenses of connecting utility lines to a home.
What decreases the basis of real property?
It can be adjusted downward by property and casualty insurance payouts, allowable depreciation resulting from renting out part of a home or using part of a residence as a place of business, and any other developments that amount to a return of cost for the property owner.
How Is the cost basis calculated on an inherited asset?
In the case of the property that you inherited, the cost basis is the purchase price plus any improvement cost that your ancestor had incurred on the property. Therefore, the purchase price, title insurance costs, settlement fees, and property taxes owed by the seller that the buyer(your ancestor) paid are all aggregated to become part of the cost basis.
What is a step-up in the cost basis of inherited property?
The step-up value of an inherited property is the current fair market value determined at the time of the buyer’s death. So, how does the step-up value reduce tax liability in the sale of inherited property? Here is how .
The step-up cost rule applies for real estate property acquired by bequest, inheritance, or by the decedent’s estate from the decedent, whether the deceased property owner had a will or not. Since the market value of the real estate increases with time, the facility to substitute the cost basis with the step-up value by the inheritor of the property substantially reduces taxable long-term capital gains. And thus, the tax liability.
The property’s fair market value on the date of death of an owner is commonly used for the step-up of the cost basis of an inherited property in the hand of the inheritor. Optionally, you (the inheritor) may choose to utilize an “alternative valuation date.” which is earlier than six months after the decedents’ death or the date the real property is sold. Here is an example :
Mr Clinton bought a home for $210,000 10 years ago. He spent $20,000 on its improvement. On his death, the property was passed on to his son this year in April. The Fair Market Value of the property on the date of the death of Mr Clinton was $600,000. In October, the son sold the property for $1,000000. Now the computation of long term capital gain would be as under
- Sale value $1,000,000
- Cost basis $230,000
- Step up price = $600,000
- Taxable capital gains = $400,000 ( $1,000,000 -$600,000)
Had there been no step-up price, the taxable gain would have been $770000
Read IRS publication Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying.
Post Disclaimer
While the information on this site - Internal Revenue Code Simplified-is about legal issues, it is not legal advice or legal representation. Because of the rapidly changing nature of the law and our reliance upon outside sources, we make no warranty or guarantee of the accuracy or reliability of information contained herein.
