1. What Is Basis Calculation For Rental Property?

The basis of a rental property represents the total investment in the property for tax purposes. It is used to calculate depreciation, capital gains, and losses when the property is sold.

2. How Does The Calculator Work?

The calculator uses the basis formula:

Where:

• \( Purchase\ Price \) — Original cost of acquiring the property
• \( Improvements \) — Capital improvements made to the property
• \( Depreciation \) — Accumulated depreciation taken on the property

Explanation: The basis starts with the purchase price, increases with capital improvements, and decreases by depreciation deductions taken over time.

3. Importance Of Basis Calculation

Details: Accurate basis calculation is essential for determining taxable gain or loss upon sale, calculating depreciation deductions, and ensuring proper tax reporting for rental properties.

4. Using The Calculator

Tips: Enter purchase price in dollars, improvements in dollars, and depreciation in dollars. All values must be non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as improvements?
A: Capital improvements that add value to the property or extend its life, such as roof replacement, kitchen renovation, or adding a room.

Q2: How is depreciation calculated?
A: Residential rental property is depreciated over 27.5 years using the straight-line method.

Q3: What's the difference between repairs and improvements?
A: Repairs maintain the property's current condition and are expensed immediately, while improvements enhance the property and are capitalized.

Q4: When should basis be adjusted?
A: Basis should be adjusted whenever capital improvements are made or when depreciation is taken each year.

Q5: How does basis affect capital gains?
A: When selling the property, the basis is subtracted from the sale price to determine the capital gain or loss for tax purposes.