What is cost basis in real estate?
In real estate, cost basis is an evaluation of a property’s value for tax purposes. Cost basis helps define how much someone may owe in taxes when a property is sold. Let’s take a deeper dive into what cost basis is and why you might want to know about it as a current or future homeowner. And while this article aims to provide a general definition of what cost basis is in real estate, every situation is different. Consider consulting with a tax professional for further information.
Cost basis defined
Put simply, cost basis in real estate is how much you paid for your home. If your home value changes from when you originally purchased it, that means your cost basis has probably changed too -- which leads us to adjusted cost basis. Adjusted cost basis is the original price of the home plus the cost of improvements and minus losses.
How is cost basis calculated?
To calculate the adjusted cost basis of a home, take the original purchase price, the cost basis, add things that increase the value of the property and subtract things that decrease the value of a property. Here are some examples of what might adjust your cost basis, whether for the positive or negative:
- Home improvements
- Depreciation
- Tax credits
- Insurance losses
In summary
Cost basis in real estate is the original purchase price of a property, while adjusted cost basis reflects changes in the value of a property over time. Cost basis helps determine how much the property increases in value, the profit, and how much a seller may be taxed when the property is sold.
