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In Accounting, what is Adjusted Basis?

Adjusted basis in accounting is the original cost of an asset, modified by factors like improvements, depreciation, or damage. It's crucial for accurately calculating gains or losses on a sale, ensuring you don't overpay on taxes. Understanding your assets' adjusted basis can lead to smarter financial decisions. How might this affect your next investment or tax return?
Brenda Scott
Brenda Scott

Basis is the accounting term for the cost of an item, or the monetary value of a person’s investment in a property. During the period of ownership, a number of factors can either increase or decrease the property’s basis. When it is eventually sold, it becomes necessary to determine the adjusted basis to calculate whether or not there is a taxable gain or deductible loss. The adjusted basis is the amount of the original investment plus certain expenses and minus certain credits or deductions.

When purchasing real estate or other property, the basis includes the actual purchase price plus certain settlement costs paid by the buyer. These include sales tax or value-added tax (VAT), freight, legal fees, recording and transfer fees, buyer’s title insurance, and any expenses owed by the seller but paid by the buyer as a part of the purchase agreement. Other expenses occurring at a later date which are included in the adjusted basis include improvements lasting more than one year, the cost of installation of utilities, assessments paid for public sidewalks or streets, and the cost of restoring a property after a casualty. When the owner eventually sells the property, he may add the cost of sale, including legal fees, commissions, and title insurance to determine the adjusted basis.

In a property purchase, the basis includes purchase price and any settlement costs paid by the buyer.
In a property purchase, the basis includes purchase price and any settlement costs paid by the buyer.

The basis of the property must also be reduced by certain events. If the owner received a reimbursement for a casualty loss, was paid to grant an easement on his property, or took a tax credit of some sort related to the property, these amounts are subtracted from the original basis. Examples of possible tax credits include those given for certain energy efficient improvements, a homebuyer's credit, or credits for development in underprivileged communities. In countries such as the US and Canada, depreciation or depletion is allowed to be taken as an expense to offset income on rental properties. These deductions must be added back in to figure the adjusted basis of the property at the time it is sold.

When calculating the adjusted basis for stock, take into account the original basis. The original basis includes the price of the stock, commission and any recording fees. If the owner receives untaxed dividends, which are actually returns of the capital invested, those amounts must be deducted from the original basis.

Stock splits also reduce the per share basis of the stock. For example, if a person has 100 shares of stock with a basis of $200 US Dollars (USD), or $20 USD per share, and the company has a 2 for 1 stock split, the investor will receive an additional 100 shares of stock at no charge. The original basis must now be split between 200 shares, reducing the per share basis to $10 USD.

The basis of inherited property is generally the fair market value (FMV) of the property at the time the decedent died or at an alternate date set by the executor or estate representative. In the US and the UK, all appreciation on inherited real estate which accrued during the original owner’s tenure is forgiven for capital gains purposes, and the only adjustments made to the basis are those listed above which have occurred during the beneficiary’s ownership. In many cases, a person who sells an inherited house shortly after acquiring ownership will actually show a taxable loss after increasing the adjusted basis of the property by the cost of sale.

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    • In a property purchase, the basis includes purchase price and any settlement costs paid by the buyer.
      By: ldprod
      In a property purchase, the basis includes purchase price and any settlement costs paid by the buyer.