The amount of your investment in property for tax purposes is called the basis of the property. This is the amount you use for calculating depreciation, amortization, depletion, and casualty losses. It is also the amount you use to calculate gain or loss on the sale, exchange or other disposition of the property for tax purposes. The U.S. federal income tax provisions refer to cost basis, adjusted basis, and basis other than cost.
When you purchase property, its basis is usually its cost, as it would be for book purposes. Certain costs related to the purchase may have to be capitalized (added to the basis). This amount then becomes your original basis in the property. Your original basis may subsequently be increased or decreased by certain events. For example, if you make improvements to the property, the basis may be increased. And if you take deductions for depreciation or casualty losses, the basis is decreased. Your adjusted basis in the property is your original basis, plus or minus the effect of these events. Basis other than cost applies for property received as a gift or inheritance, or through involuntary conversions and certain other circumstances.
Property You Purchase for Use in Your Business
The basis of property you purchase is its cost to you, including amounts you pay in money, debt you assume, and property or services you give in exchange. The cost also includes sales tax, freight, installation and testing, and excise taxes. If you purchase real property, the basis is increased for certain costs related to the purchase. These include closing costs and settlement fees, such as fees for an abstract of the title, legal fees for title search and preparation of the sales contract and deed, recording fees, surveys, transfer taxes, and owner’s title insurance. Any amounts that the seller did not pay and that you as the purchaser agree to pay, such as back taxes, interest, mortgage fees, charges for improvements or repairs, and sales commissions, also become part of your basis in the property. Points you pay to obtain a mortgage loan or other credit to purchase the property are not added to the basis, but rather, are amortized over the life of the loan. If you assume an existing mortgage on the property, your basis includes the amount you pay plus the balance due on the mortgage.