1. What Is Adjusted Basis?

Adjusted Basis (AB) represents the cost basis of a property adjusted for various factors including improvements and depreciation. It is used for tax purposes when calculating capital gains or losses upon the sale of a property.

2. How Does The Calculator Work?

The calculator uses the adjusted basis formula:

Where:

• \( AB \) — Adjusted Basis ($)
• \( OB \) — Original Basis ($)
• \( Improvements \) — Cost of property improvements ($)
• \( Depreciation \) — Accumulated depreciation ($)

Explanation: The adjusted basis starts with the original purchase price and is increased by capital improvements while being decreased by depreciation deductions taken over time.

3. Importance Of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is crucial for determining taxable gain or loss when selling a property, ensuring proper tax compliance, and maximizing legitimate tax deductions.

4. Using The Calculator

Tips: Enter original basis in dollars, improvements in dollars, and depreciation in dollars. All values must be non-negative numbers representing valid monetary amounts.

5. Frequently Asked Questions (FAQ)

Q1: What constitutes "improvements" for basis calculation?
A: Improvements include capital expenditures that add value to the property, extend its life, or adapt it to new uses, such as room additions, kitchen renovations, or new roofing.

Q2: How is depreciation calculated for residential property?
A: Residential rental property is typically depreciated over 27.5 years using the straight-line method, while commercial property uses 39 years.

Q3: What is included in original basis?
A: Original basis includes purchase price plus certain closing costs and fees, such as legal fees, recording fees, and transfer taxes paid by the buyer.

Q4: Can adjusted basis be negative?
A: No, adjusted basis cannot be negative. If depreciation exceeds the sum of original basis and improvements, the adjusted basis is typically considered zero.

Q5: When is adjusted basis used in tax calculations?
A: Adjusted basis is used to calculate capital gains when selling a property: Sale Price - Adjusted Basis = Capital Gain/Loss.