1. What Is Adjusted Basis?

Adjusted basis refers to the original cost of an asset adjusted for various factors such as improvements, depreciation, and other capital expenditures. It is used to determine the capital gain or loss when the asset is sold.

2. How Does The Calculator Work?

The calculator uses the adjusted basis formula:

Where:

• \( \text{Original Basis} \) — Initial purchase price of the asset
• \( \text{Additions} \) — Capital improvements and additions to the asset
• \( \text{Subtractions} \) — Depreciation, casualty losses, and other reductions

Explanation: The adjusted basis represents the true investment in the property for tax purposes, accounting for all capital expenditures and reductions over time.

3. Importance Of Tax Basis Adjustment

Details: Accurate calculation of adjusted basis is crucial for determining taxable gains or losses when selling property, ensuring proper tax reporting and compliance with IRS regulations.

4. Using The Calculator

Tips: Enter the original purchase price in dollars, all capital additions in dollars, and any subtractions such as depreciation in dollars. All values must be non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What constitutes additions to basis?
A: Additions include capital improvements like renovations, additions, legal fees for property acquisition, and other permanent enhancements that increase the property's value.

Q2: What are common subtractions from basis?
A: Common subtractions include depreciation deductions, casualty losses not covered by insurance, and certain tax credits received.

Q3: Why is adjusted basis important for tax purposes?
A: Adjusted basis determines the capital gain or loss when you sell the property, which directly affects your tax liability.

Q4: How does adjusted basis differ from market value?
A: Adjusted basis represents your actual investment in the property, while market value is what the property could sell for in the current market.

Q5: Can adjusted basis be negative?
A: No, adjusted basis cannot be negative. If subtractions exceed the original basis plus additions, the adjusted basis would be zero.