How To Calculate Adjusted Basis Of Home Sold

Adjusted Basis Formula:

\[ \text{Adjusted Basis} = \text{Purchase Price} + \text{Improvements} - \text{Depreciation/Casualty} \]

Adjusted Basis:

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1. What Is Adjusted Basis Of Home Sold?

The adjusted basis of a home sold represents the total cost basis of the property after accounting for capital improvements and depreciation. It is used to calculate capital gains tax when selling a property by determining the actual profit from the sale.

2. How Does The Calculator Work?

The calculator uses the adjusted basis formula:

\[ \text{Adjusted Basis} = \text{Purchase Price} + \text{Improvements} - \text{Depreciation/Casualty} \]

Where:

\( \text{Purchase Price} \) — Original cost of purchasing the home
\( \text{Improvements} \) — Cost of capital improvements made to the property
\( \text{Depreciation/Casualty} \) — Depreciation taken or casualty losses claimed

Explanation: The adjusted basis starts with the original purchase price, adds the cost of any improvements that increase the property's value, and subtracts any depreciation or casualty losses that have been claimed.

3. Importance Of Adjusted Basis Calculation

Details: Calculating the adjusted basis is crucial for determining capital gains tax liability when selling a home. A higher adjusted basis results in lower taxable gain, potentially reducing your tax burden significantly.

4. Using The Calculator

Tips: Enter the original purchase price of the home, total cost of all capital improvements made, and any depreciation or casualty losses claimed. All values must be in dollars and non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as a capital improvement?
A: Capital improvements are permanent additions that increase the home's value, such as room additions, kitchen renovations, new roofing, or landscaping. Routine maintenance and repairs do not qualify.

Q2: How does adjusted basis affect capital gains?
A: Capital gain is calculated as Sale Price minus Adjusted Basis. A higher adjusted basis means lower capital gain and potentially lower taxes.

Q3: What is the difference between basis and adjusted basis?
A: Basis is the original cost of the property, while adjusted basis includes improvements and subtracts depreciation over time.

Q4: Can I include all home repairs in improvements?
A: No, only capital improvements that add value to the property qualify. Routine maintenance like painting or fixing leaks does not increase basis.

Q5: How do I prove my adjusted basis for tax purposes?
A: Keep records of purchase documents, receipts for all improvements, and documentation of any depreciation claimed on tax returns.