Tax Basis
The amount of investment in an asset for tax purposes, used to determine gain or loss when the asset is sold or otherwise disposed of.
Detailed Explanation
Basis typically starts at the purchase price and is adjusted upward for improvements and downward for depreciation, returns of capital, or losses. Different assets have different basis rules: inherited property generally receives a stepped-up basis to fair market value at the date of death, while gifted property carries over the donor's basis. Tracking basis accurately is critical for correct capital gains calculations on Form 8949 and Schedule D.
Key Points
- Basis usually starts at cost (purchase price plus acquisition costs).
- Adjusted up for capital improvements; down for depreciation, casualty losses, and returns of capital.
- Inherited property gets a stepped-up basis to fair market value at date of death (IRC §1014).
- Gifted property generally carries over the donor's basis (IRC §1015).
- Without proof of basis, the IRS may treat the entire sale proceeds as gain, so keep purchase and improvement records.
Practical Example
You buy a rental house for $300,000 and spend $50,000 on a new roof and kitchen, making your basis $350,000. Over the years you claim $90,000 of depreciation, reducing adjusted basis to $260,000. If you sell for $500,000, your gain is $240,000 ($500,000 minus $260,000), of which $90,000 is subject to depreciation recapture.
Related TS CPA Service
Tailored and accurate tax preparation, because your financial situation deserves more than a template.
Learn about Individual Tax PreparationRelated Terms
Capital Gain
The profit realized from the sale of a capital asset such as stock, real estate, or cryptocurrency, taxed at preferential rates if held longer than one year.
Form 8949 (Sales and Other Dispositions of Capital Assets)
The IRS form used to report each individual sale or disposition of a capital asset, with totals flowing to Schedule D.
Depreciation
The deduction of the cost of a tangible business asset over its useful life, reflecting wear, tear, or obsolescence.
Have a Question About Tax Basis?
Get a free, no-obligation answer from a licensed CPA. We respond the same day.
Free Consultation