How Is Adjusted Cost Basis Calculated For Rental Property

Adjusted Cost Basis Formula:

\[ ACB = Purchase\ Price + Improvements - Depreciation + Closing\ Costs \]

Purchase Price:

Improvements:

Depreciation:

Closing Costs:

Adjusted Cost Basis (ACB):

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1. What Is Adjusted Cost Basis?

Adjusted Cost Basis (ACB) represents the total capital investment in a rental property after accounting for various adjustments. It's used to determine capital gains or losses when the property is sold and is essential for accurate tax reporting.

2. How Does The Calculator Work?

The calculator uses the Adjusted Cost Basis formula:

\[ ACB = Purchase\ Price + Improvements - Depreciation + Closing\ Costs \]

Where:

\( Purchase\ Price \) — Original purchase price of the property
\( Improvements \) — Capital improvements made to the property
\( Depreciation \) — Total depreciation claimed over ownership period
\( Closing\ Costs \) — Costs associated with purchasing the property

Explanation: The formula calculates the adjusted basis by starting with the original cost, adding capital improvements and closing costs, then subtracting accumulated depreciation.

3. Importance Of ACB Calculation

Details: Accurate ACB calculation is crucial for determining capital gains tax liability when selling rental property, ensuring proper tax reporting, and maximizing investment returns through proper basis tracking.

4. Using The Calculator

Tips: Enter all amounts in dollars. Include all capital improvements (roof replacement, kitchen remodel, etc.), total depreciation claimed, and all closing costs from the original purchase. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as a capital improvement?
A: Capital improvements are additions or upgrades that increase property value, extend useful life, or adapt to new uses (e.g., new roof, room addition, HVAC system).

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: What closing costs can be included?
A: Include attorney fees, title insurance, recording fees, transfer taxes, and other costs directly related to acquiring the property.

Q4: Why subtract depreciation?
A: Depreciation reduces your basis because it represents the portion of your investment that has been "recovered" through tax deductions over time.

Q5: When is ACB used?
A: ACB is used to calculate capital gains when selling the property: Sale Price - ACB = Capital Gain/Loss.