Real Estate Investing - Basis Explained

Our complex IRS code requires that your, as a real estate investor, accurately calculate your "basis" in investment property when reporting a gain or loss on a tax return.

Your monetary gain or loss when you sell investment property is determined by comparing the sale price to the adjusted basis in the property.

Your original basis is determined by the way the property was acquired -- whether through purchase, in trade, or received as a gift or inheritance.

We will briefly cover how you determine basis in an investment property you have purchased.

The original basis is determined by adjustments in the total cost of the purchase.

The adjustments include depreciation, or additions, such as capital improvements... perhaps you added a room.

If the total purchase price of the property (including all closing costs) was $100,000... your basis was $100,000.

Later you added a room at a cost of $20,000... your new basis is $120,000. Still later you replaced the roof at a cost of $8,000... your new basis is $128,000.

Adjusted basis is the new basis after additions or deductions to the original basis have been made.

The basis of purchased property is the purchase price plus other expenses such as installation of upgrades, option premiums paid, and other expenses of buying the property.

The basis of land includes the purchase price plus legal and recording fees, abstract fees, survey costs, and payments for non-depreciable permanent improvements.

When property is improved the basis is the total cost of the construction. This cost is not taken as an expense in the year of construction. The cost becomes the basis of the property.

Depreciation is calculated on the property's basis.

When sell your investment property an Adjusted Basis is used in calculating capital gain or loss.

Adjusted basis reflects increases or decreases in the value of the property during the period you owned it. Increases in basis come from improvements that add to the property's value.

Decreases in basis come from depreciation, casualty loss, and other reductions in the value of the property.

Adjusted basis is not a result of inflation and change in the market value of your property. They would only effect market value.

Increases in basis come from improvements to your property that have a useful life of more than one year. Generally the cost of improvements which add to the basis include supplies and materials purchased for major repairs or additions, legal fees, recording fees, and similar charges.

Calculating adjusted basis can get very complicated. It is best left to an accountant with real estate experience.

The IRS offers a detailed treatment of basis here: www.irs.gov/pub/irs-pdf/p551.pdf

About The Author -

Mark Walters is an investor and author. His publications can be found at http://www.CashFlowInstitute.com

In The News:

Future of commercial real estate in India - People  Construction Week Online India
Pune's real estate market post pandemic - People  Construction Week Online India
The 10 best cities for lab real estate  Becker's Hospital Review
ESG in real estate - People  Construction Week Online India

Cashing Out of Preforeclosures - Exit Strategies for Maximum Profit

One of the quickest ways to real estate profits is... Read More

Real Estate Remains A Strong Investment

Opportunities to make big, quick profits in residential real estate... Read More

Evil Gains Entry

When we open our doors to strangers, we can never... Read More

Home Staging: How to Make Your Tract Home Stand Out in the Crowd

Home sellers who wish to market their property in development... Read More

Dont Overpay for a House, Even in Todays Market

If there's one thing American investors love, it's an over-inflated... Read More

7 Marketing Methods for Real Estate Coaches

You shower, shampoo, dress your best, check to see if... Read More

Investment Real Estate Secret: Buy a House Today, With No Money Down

If you've read my article "Purchasing Property With No Money... Read More

Finding the Right Buy to Let Mortgage for Your Investment Property

Finding the right buy to let mortgage is crucial to... Read More

Equity

Equity is the value of your home minus what you... Read More

Selling Your Home - A FSBOs Guide to Keeping It Safe

Sellers need to keep their safety in mind when prospecting... Read More

Realities of Real Estate Investing

If you are anything like me, you are always looking... Read More

How To Get Top Dollar For Your Home ? Fast

1. Time is money when selling your homeAfter you've made... Read More

Dont Buy Ugly Houses!

Ugly houses can be great investments, but we don't buy... Read More

Get Rich With Mobile Homes

Does the myth that mobile homes depreciate in value keep... Read More

Using Color Psychology to Sell Your Home

When painting your home for resale, choosing the right colors... Read More

Quality of Life in Sussex County Delaware. Facts, Statistics, Observations and even opinions!

We Sussex Countians are fortunate in many ways as we... Read More

Sell Your Home Without Paying Any Commissions

All of us know that real estate commissions can work... Read More

Fantasy Gap [fast money in real estate]

I was in the rental business for seven-years, made 1.3... Read More

Buying Foreclosures - Knowing Why Helps You Buy

One big potential deal-killer in buying foreclosures is the homeowner.... Read More

Home Selling: Making It Easy On Yourself!

It's a dream for many to buy and take ownership... Read More

Where To Start In Looking For A Central Illinois Realtor

Central Illinois is an excellent location for families and businesses.... Read More

Guide To Finding The Perfect Central Illinois House

Central Illinois is an area rich in cultural activities and... Read More

The Best Way To Get Real Estate Listings

The Real Estate Industry is HUGE and is a golden... Read More

Real Estate: Reasons and Priorities for Purchasing Property

Real Estate: Reasons and Priorities for Purchasing Property. It's not... Read More

Real Estate for Beginners: Residential Property Taxes

Whenever you own a piece of land, you will be... Read More