1. What is Cost Basis?

Cost Basis represents the total investment in a property for tax purposes. It includes the original purchase price plus any capital improvements, minus accumulated depreciation. This value is crucial for calculating capital gains when selling a property.

2. How Does the Calculator Work?

The calculator uses the cost basis formula:

Where:

• \( Purchase\ Price \) — Original purchase price of the home
• \( Improvements \) — Cost of capital improvements made to the property
• \( Depreciation \) — Accumulated depreciation claimed on the property

Explanation: The formula calculates the adjusted basis of your home, which is used to determine taxable gain or loss when the property is sold.

3. Importance of Cost Basis Calculation

Details: Accurate cost basis calculation is essential for tax reporting when selling a property. It helps determine capital gains tax liability and ensures proper tax compliance. A higher cost basis results in lower taxable gains.

4. Using the Calculator

Tips: Enter all amounts in your local currency. Include only capital improvements (not routine maintenance) and use the total depreciation claimed over the ownership period. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What counts as a capital improvement?
A: Capital improvements are permanent additions that increase property value, such as room additions, kitchen renovations, or new roofing. Routine maintenance and repairs are not included.

Q2: How is depreciation calculated?
A: For rental properties, depreciation is typically calculated over 27.5 years for residential property using the straight-line method. Personal residences generally don't claim depreciation.

Q3: Can cost basis be adjusted after purchase?
A: Yes, cost basis can be adjusted upward for improvements and downward for casualty losses or depreciation deductions.

Q4: What if I inherited the property?
A: Inherited properties typically receive a "step-up" in basis to the fair market value at the time of inheritance, which may be different from the original purchase price.

Q5: How does cost basis affect capital gains?
A: When selling, capital gain = selling price - selling expenses - cost basis. A higher cost basis reduces your taxable capital gain.