I often come across the term adjusted cost basis of the properties. What does it mean, and how do you find out an asset’s adjusted cost basis?
This is a very normal question in the mind of property sellers,” What is the adjusted cost basis? “. Well, the definition of ” adjusted cost basis” is given in section 1016 of the Internal Revenue Code to mean the net cost of an asset after adjusting for increases in improvements to the property or decreases in depreciation deductions allowed for the property. So based on the definition, you can find out the adjusted cost basis of the property as under :
Step 1 : Asset’s Purchase Price
Add to it Cost of Improvements
Reduce from it – Accumulated Depreciation Claimed
That gives you an adjusted cost basis of the property
Example of calculation of adjusted cost basis
Let us say the asset’s purchase price is $80,000 and has a life of 20 years. Say you claimed $4,000 per year in depreciation deductions for the next five years, and at the end of which, you are selling the asset. You also spent $5000 on the renovation of the properties. For that purpose, you need to determine your asset’s adjusted cost basis, which will be
$80,000 + 5000-($4,000 * 5) = $65,000.
The adjusted cost basis of the property in the sixth year is $65,000.
Do you know, the adjusted cost basis is used every time you sell assets -depreciable properties or non-depreciable properties ? Then the issue of depreciation recapture will also come up. You can test this depreciation recapture calculator.
