1. What Is Adjusted Basis?

Adjusted basis represents the total investment in a rental property for tax purposes. It is used to determine capital gains or losses when the property is sold. The adjusted basis starts with the original purchase price and is adjusted for various factors including improvements and depreciation.

2. How Does The Calculator Work?

The calculator uses the adjusted basis formula:

Where:

• \( \text{Cost} \) — Original purchase price of the property
• \( \text{Improvements} \) — Capital improvements made to the property
• \( \text{Depreciation} \) — Total depreciation claimed on the property

Explanation: The formula calculates your adjusted basis by starting with the original cost, adding capital improvements that increase the property's value, and subtracting depreciation deductions taken over the ownership period.

3. Importance Of Adjusted Basis Calculation

Details: Accurate adjusted basis calculation is crucial for determining taxable gain or loss on rental property sales. It directly impacts your capital gains tax liability and helps ensure proper tax reporting to the IRS.

4. Using The Calculator

Tips: Enter the original purchase cost, total cost of capital improvements, and total depreciation claimed. All values must be in dollars and non-negative. Capital improvements include major renovations that add value or extend the property's life.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as a capital improvement?
A: Capital improvements are substantial additions or renovations that increase property value, extend its useful life, or adapt it to new uses. Examples include roof replacement, room additions, kitchen remodeling, and HVAC system upgrades.

Q2: How is depreciation calculated for rental property?
A: Residential rental property is depreciated over 27.5 years using the straight-line method. The depreciable basis is typically the building value (excluding land) divided by 27.5 years.

Q3: What's the difference between repairs and improvements?
A: Repairs maintain the property's current condition and are deductible expenses. Improvements add value or extend life and are added to basis. Painting walls is a repair; adding a room is an improvement.

Q4: Why is adjusted basis important for tax purposes?
A: Adjusted basis determines your taxable gain: Selling Price - Adjusted Basis = Taxable Gain. A higher adjusted basis means lower taxable gain and less capital gains tax.

Q5: Can I adjust basis for selling expenses?
A: Yes, selling expenses like real estate commissions, legal fees, and advertising costs can be added to your basis, further reducing your taxable gain.