Adjusted basis represents the net cost of (in our case) a rental income property adjusted for certain federal income tax related items; in other words, it refers to the increase or decrease in the property’s value due to depreciation and or capital enhancements.
It is a crucial component when calculating capital gains and losses for income tax purposes on an outright sale of a rental property since the adjusted basis is higher than the original price and will lower capital gains taxes.
In this article we’ll look at this income tax cost basis and show you how it’s computed on a rental income property sale.
Adjusted Basis
Represents the beginning basis of the property (depreciable basis plus land value) plus value of capitalized items less accumulated depreciation taken under depreciation guidelines during the holding period.
Capitalized items are those costs incurred over the holding period that extended the life of the investment and therefore were subject to depreciation.
Formulation
Purchase price
+ Costs of acquisition
= Original basis
+ Capital additions
– Depreciation taken
= Adjusted Basis
Example
Let’s say that you purchased a 25-unit apartment complex several years ago for $1,125,000 and incurred $27,000 in acquisition costs. Since then you have made $50,000 in capital improvements to the property and have taken $95,475 in accumulated depreciation. You want to know what your current adjusted basis is in order to plug it in for your taxable gain computation.
$1,125,000
+ 27,000
= 1,152,000
+ 50,000
– 95,475
= 1,106,525
Illustration
Let me show you how easily you can determine your adjusted basis using iCalculator (click image to enlarge).
Source: iCalculator by ProAPOD
So You Know
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