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Article source: http://www.erises.com/. Used with authors permission.
Our complex IRS code requires that your, as a real estate investor,accurately calculate your basis in investment property when reportinga gain or loss on a tax return.
Your monetary gain or loss when you sell investment propertyis determined by comparing the sale price to the adjustedbasis in the property.
Your original basis is determined by the way the propertywas acquired -- whether through purchase, in trade, orreceived as a gift or inheritance.
We will briefly cover how you determine basis in an investmentproperty you have purchased.
The original basis is determined by adjustments in the totalcost of the purchase.
The adjustments include depreciation, or additions, such ascapital improvements... perhaps you added a room.
If the total purchase price of the property (including allclosing costs) was $100,000... your basis was $100,000.
Later you added a room at a cost of $20,000... your newbasis is $120,000. Still later you replaced the roof ata cost of $8,000... your new basis is $128,000.
Adjusted basis is the new basis after additions or deductionsto the original basis have been made.
The basis of purchased property is the purchase price plusother expenses such as installation of upgrades, optionpremiums paid, and other expenses of buying the property.
The basis of land includes the purchase price plus legal andrecording fees, abstract fees, survey costs, and paymentsfor non-depreciable permanent improvements.
When property is improved the basis is the total cost of theconstruction. This cost is not taken as an expense in the yearof construction. The cost becomes the basis of the property.
Depreciation is calculated on the propertys basis.
When sell your investment property an Adjusted Basis is used incalculating capital gain or loss.
Adjusted basis reflects increases or decreases in the value ofthe property during the period you owned it. Increases in basiscome from improvements that add to the propertys value.
Decreases in basis come from depreciation, casualty loss, andother reductions in the value of the property.
Adjusted basis is not a result of inflation and change in themarket value of your property. They would only effectmarket value.
Increases in basis come from improvements to your property thathave a useful life of more than one year. Generally the cost ofimprovements which add to the basis include supplies andmaterials purchased for major repairs or additions, legal fees,recording fees, and similar charges.
Calculating adjusted basis can get very complicated. It is bestleft to an accountant with real estate experience.
The IRS offers a detailed treatment of basis here:www.irs.gov/pub/irs-pdf/p551.pdf About The Author -
Mark Walters is an investor and author. His publications canbe found at http://www.CashFlowInstitute.com
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