Basis rule

# Basis rule - Basis Basis or adjusted basis is an important...

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Basis Basis, or adjusted basis, is an important concept in taxation. It’s the amount you use for depreciation calculations and to measure gain or loss when property is sold or exchanged. Typically, your tax basis is what you pay for an item – the cost. But it may be adjusted up or down depending on circumstances. For example, depreciation deductions reduce basis. Example : Tom buys a machine for \$10,000. That’s his basis as a start. In Year 1, he claims a depreciation deduction of \$1,429. At the end of that year, his adjusted basis is now \$8,571 (\$10,000 minus \$1,429). Example : Ellen buys a building for \$1,000,000. She spends \$250,000 to have several new floors added on (this is called a capital improvement). Her adjusted basis in the building is now \$1,250,000. Note: routine repair/maintenance expenses do not have an effect on basis. Basis includes funds borrowed to pay for the property. However, when the property is sold, the debt you are released from is included in the sale price. Example : Michelle borrows \$100,000 from her aunt, adds \$400,000 of her own, and buys land for \$500,000. Even though she only “invested” \$400,000 of her own, her basis for tax purposes is \$500,000. Several years later, she sells the land to Donna for \$430,000 in cash, plus Donna “takes over” the

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Basis rule - Basis Basis or adjusted basis is an important...

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