Adjusted basis

Last updated

In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items. [1]

Contents

Adjusted Basis or Adjusted Tax Basis refers to the original cost or other basis of property, reduced by depreciation deductions and increased by capital expenditures.

Example: Michael buys a lot for $100,000. He then erects a retail facility for $600,000, then depreciates the improvements for tax purposes at the rate of $15,000 per year. After three years his adjusted tax basis is $655,000 = $100,000 + $600,000 - (3 x $15,000).

Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes. The Amount Realized – Adjusted Basis tells the amount of Realized Gain (if positive) or Realized Loss (if negative).

Statutory definition

Section 1012 of the Internal Revenue Code defines “basis” as a taxpayer's cost in acquiring property, except as provided in Sections 1001–1092. [2] [3] [4] There is also an exception or "Special rule" under section 1012 (b) for "apportioned real estate taxes." [3]

Section 1016 then lists 27 adjustments to this basis. [5] Generally, improvements to property increase basis while depreciation deductions decrease it.

Calculation

Adjusted basis is calculated by beginning with an asset's original cost basis, and then making adjustments. Adjusted basis is calculated as follows:

Minus the costs represented by:

Adjusted basis

Adjusted basis is crucial for calculating capital gains and ordinary gains when an asset is sold.

A complete list of adjustments which increase or decrease basis is found in IRS Publication 551, Basis of Assets. [6]

References

  1. Bragg, Steven (2023-06-01). "Adjusted basis definition". AccountingTools. Retrieved 2023-07-26.
  2. "Section 1012 - Basis of Cost - Generally" (pdf). United States government website. October 4, 2024. Retrieved March 12, 2025.
  3. 1 2 "26 U.S. Code § 1012 - Basis of property—cost". Cornell Law School, Legal Information Institute. December 19, 2014. Retrieved March 12, 2025.
  4. "Section 1012 - Basis of property-cost: 18 Analyses of this statute by attorneys". Thompson-Reuters. February 8, 2024. Retrieved March 12, 2025.[ dead link ]
  5. "26 U.S. Code § 1016 - Adjustments to basis". Cornell Law School, Legal Information Institute. August 12, 2022. Retrieved March 12, 2025.
  6. "About Publication 551, Basis of Assets". IRS official government website. May 22, 2024. Retrieved March 12, 2025.