What is Adjusted Basis?

Below is an explanation of what adjusted basis is. Adjusted basis, along with other type of basis are important for 1031 exchanges. Adjusted basis is often used as the new basis for a like kind exchange. You can find more information on adjusted tax basis in the IRS publication on sale of a real estate property. Adjusted basis is also important when calculating capital gains and losses. Below is the definition of adjusted basis as well as an example of how to calculate the adjusted cost basis.

What is an adjusted basis?

Adjusted basis is the changes in the new basis of the asset at any giving time after the original acquisition. The tax basis of any capital assets such as real estate can increase or decrease over time. The increased value or decreased value is the adjusted basis of the capital asset that is different from the original or acquired value. In another word, adjusted basis is the original cost which is decreased by depreciation and exhaustion and increased by the amount of improvements made on the capital asset.

Example of how to calculate adjusted basis

When calculating the adjusted basis, you first need to calculate depreciation of the capital asset. Each capital asset has different depreciation rates depending on how fast the asset depreciates. There are many methods of calculating depreciation to arrive at the adjusted cost basis. The additional capital investment can be anything from new roofs, new floor, tiling, piping, etc. The added capital investment adds to the cost of the capital asset so instead of spending just $100,000 (original cost) on the capital asset, your cost is now the original cost plus added investments. The overall spending on the capital asset is reduced by the amount that you have used the capital asset which reflects in the depreciation.