Basis (Tax Basis)
Basis is the cost or adjusted value of an asset used to determine gain or loss on sale or disposition. Original cost basis includes purchase price plus improvements minus depreciation. Gift basis equals the donor's basis (carryover), while inherited property receives a stepped-up basis to fair market value at death.
Exam Tip
Cost basis = purchase price + improvements - depreciation. Gifts = carryover (donor's basis). Inheritance = stepped-up (FMV at death). This is heavily tested on the EA exam.
What is Tax Basis?
Basis represents your investment in an asset for tax purposes. It determines the gain or loss when you sell or dispose of the asset.
Types of Basis
| Type | How Determined |
|---|---|
| Cost basis | Purchase price + closing costs + improvements |
| Adjusted basis | Cost basis - depreciation - casualty losses + improvements |
| Gift basis (carryover) | Donor's basis (for gain); FMV if lower (for loss) |
| Inherited basis (stepped-up) | FMV at date of death |
| Converted property | FMV at conversion date |
Basis Adjustments
| Increases Basis | Decreases Basis |
|---|---|
| Capital improvements | Depreciation taken |
| Legal fees for title | Casualty loss deductions |
| Assessment for local improvements | Insurance reimbursements |
| Restoration after casualty | Section 179 deductions |
Exam Alert
Gift basis = donor's basis (carryover). Inherited basis = FMV at death (stepped-up). Adjusted basis = cost + improvements - depreciation. Always know whether to use carryover or stepped-up basis based on how the asset was acquired.
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Related Terms
Carryover Basis
Carryover basis means the recipient of a gift takes the donor's original cost basis, with adjustments for gift tax paid. Used for lifetime gifts (NOT inheritance, which gets stepped-up basis).
Capital Gains Tax
Capital gains tax is a tax on the profit from selling investments or assets. Short-term gains (assets held less than 1 year) are taxed as ordinary income; long-term gains (held more than 1 year) receive preferential rates of 0%, 15%, or 20% based on income.
Depreciation
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, allowing businesses and rental property owners to deduct the cost of assets as they wear out or become obsolete.
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