Adjusted Basis

Business, Legal & Accounting Glossary

Definition: Adjusted Basis



What is the dictionary definition of Adjusted Basis?

Dictionary Definition


n. in accounting, the original cost of an asset adjusted for costs of improvements, depreciation, damage and other events which may have affected its value during the period of ownership. This is important in calculating capital gains for income tax purposes since the adjusted basis is generally higher than the original price and will lower capital gains taxes.


Full Definition of Adjusted Basis


Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes. The Amount Realized – Adjusted Basis tells the amount of Realized Gain (if positive) or Realized Loss (if negative).

Statutory Definition

Section 1012 of the Internal Revenue Code defines “basis” as a taxpayer’s cost in acquiring property, except as provided in Sections 1001-1092. Section 1016 then lists 27 adjustments to this basis. Generally, improvements to property increase basis while depreciation deductions decrease it.

Calculation

Adjusted basis is calculated by beginning with an asset’s original cost basis, and then making adjustments.

Adjusted basis is calculated as follows:

  • Purchase costs (title & escrow fees, broker commissions, shipping, sales tax, etc.)
  • Improvements (rehabilitation expenses & substantial repairs)
  • Legal fees (to defend or to perfect title to the property, zoning costs, etc.)
  • Selling costs (title & escrow fees, broker commissions, shipping, transfer fees, etc.)

Minus the costs represented by:

  • Accumulated depreciation, depletion, or amortization
  • Casualty or theft Loss
  • Other decreases to basis

Adjusted basis is crucial for calculating capital gains and ordinary gains when an asset is sold.

A complete list of adjustments which increase or decrease basis is found in IRS Publication 551, Basis of Assets.

The adjusted basis for tax purposes are different than for financial accounting (GAAP) gains or losses on sales of capital assets.


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Definition Sources


Definitions for Adjusted Basis are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th April, 2020 | 1 Views.