Basis is a tax term that is used to calculate capital gains tax, capital gains exemption, depreciation, and boot in 1031 exchanges of real estate. When dealing with tax matters, talk with an accountant. Don’t have a Los Angeles accountant? I’m happy to provide referrals.
You want the property’s basis higher rather than lower, because you will have more depreciation to take, and lower capital gain. Refer to IRS publication 551 for more information on Basis.
Most of the time, the basis of your property is how much it cost you to buy it or build it.
EX: Tom, purchased a 8 plex in 1979 for $225,000. Tom’s basis is $225,000.
If you inherited property or receive it as a gift, depending on how title was held– you can receive a stepped up basis to fair market value as the new owner, or take the adjusted basis of the previous owner.
EX: Tom passed away in 1999 and left his 8 plex to his Daughter Sandy. In 1999, the 8 plex has a fair market value of $475,000 – this is now Sandy’s new stepped up basis.
Adjusted Basis: Over the years, the basis of a property can change. The two most common reasons for adjusting the basis are for Capital Improvements and Depreciation for investment property. Routine maintenance, such as replacing worn out carpet, or painting does not count as capital improvements or affect the basis.
|Increase Basis||Decrease Basis|
|Capital ImprovementsSpecial Assessments for local improvements
Causality Losses (any loss not covered by insurance)
Consideration for Granting Easement
Capital Improvements add to the original basis, and depreciation reduces from the original basis.
EX: Sandy spent $150,000 to build a 4 car garage for the 8 plex in 2004. That $150,000 can be added to her original basis of $475,000 to give Sandy a new basis of $625,000
EX: Sandy has taken a straight line depreciation for the property, land value is worth $200,000 and 8plex is worth $275,000. Sandy is allowed to depreciate the 8 plex $10,000 each year. In 2004, she has depreciated 5 years, totaling $50,000. Sandy’s new basis is $575,000.