How to calculate the adjusted basis of the property?

cost basis of real estate

When you sale a property that you inherited, you will have to examine if there was any taxable capital gains . This is so because you are liable to pay tax on any capital gains earned on such a sale or transfer of the inherited real estate property. At that point in time terms like -cost basis or step-up – will come into play. You can see our real estate capital gains calculator. Therefore, it’s helpful to understand some of the jargons associated with the sale or transfer of inherited real estate.

What does “cost basis” mean?

Cost basis is the original purchase price of real estate, plus certain expenses and fees incurred by the buyer, many of which are detailed in closing documents. So, in case of property that you got as inheritance, cost basis is the purchase price plus any improvement cost that your ancestor incurred. 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 respect of property?

Basically , the step-up value of a real estate is the current fair market value determined at the time of the buyer’s death.

Real Estate cost basis calculator

How the step-up value reduce tax liability?

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 goes up 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. Let us take an example to understand

The step-up in basis fair market value is commonly calculated as of the date of death. Optionally, you (inheritor) may choose to utilize an “alternative valuation date.” which is earlier of six months after the decedents’ death, or the date the real property is sold.

Mr Clinton bought a home for $210,000 10 years ago. He spent $20,000 on its improvement. On his death, the property passed on to his son this year in the month of April .The Fair Market Value of the proproperty on the date of death of Mr Clinton was $600,000. In October , the son sold the property for $1,000000. Now the computation of long term capital gsin 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

What increases the basis of real property?

It can adjusted upward by

  • the cost of home improvements/additions,
  • rebuilding costs following a disaster,
  • legal fees linked to property ownership,
  • expenses of linking utility lines to a home. .

What increases the basis of real property?

It can be adjusted downward by

It can be adjusted downward by property and casualty insurance payouts, allowable depreciation as a result of 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

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