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Adjusted Basis Formula:
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The adjusted basis of a rental property is the original cost basis of the property plus the cost of any capital improvements made, minus any depreciation taken. This figure is crucial for calculating capital gains taxes when you sell the property.
The calculator uses the adjusted basis formula:
Where:
Explanation: The adjusted basis represents your investment in the property for tax purposes and is used to determine taxable gain or loss upon sale.
Details: Accurate adjusted basis calculation is essential for proper tax reporting when selling rental property, determining capital gains tax liability, and maximizing tax savings through proper basis adjustment.
Tips: Enter the original property cost, total cost of capital improvements, and total depreciation claimed. All values must be in dollars and non-negative.
Q1: What qualifies as a capital improvement?
A: Capital improvements are additions or upgrades that increase property value, extend its useful life, or adapt it to new uses (e.g., new roof, room addition, kitchen remodel).
Q2: How is depreciation calculated?
A: Residential rental property is depreciated over 27.5 years using the straight-line method, based on the building value (excluding land).
Q3: Can I include repair costs in improvements?
A: No, routine repairs and maintenance are not capital improvements and should be deducted as expenses in the year they occur.
Q4: What happens if my adjusted basis is negative?
A: Adjusted basis cannot be negative. If depreciation exceeds cost plus improvements, you've claimed more depreciation than allowed.
Q5: How does adjusted basis affect my taxes when I sell?
A: Your taxable gain is calculated as Sale Price minus Selling Expenses minus Adjusted Basis. A higher adjusted basis means lower taxable gain.