What is Basis in Real Estate?

If you own real estate, you have a "Basis" in that property.

There are 3 ways that your Basis (B) in property comes into existence.

1) You bought the property.

2) You received the property as a gift, or

3) You inherited the property.

Purchased Property

If you bought the property, your Basis is what you paid for the property.

If you've made any capital improvements to the property, this about is added to your Basis, unless you identify the improvements separately and depreciate them separately on your Depreciation Schedule.

If you purchased a rental property for $265,000 today, your Basis in that property is what you paid for it, plus any costs of acquisition, usually just your Closing Costs.

If you incurred $5000 in acquisition costs, then your Basis in the property is $270,000.

If you spend $30,000 improving the property, then your Basis in the property becomes $300,000.

If you sell at this point, your Capital Gains will be the difference between your $300,000 Basis and your Net Sales Proceeds.

If you rent out the property, you will be allowed to claim an annual depreciation allowance, and deduct that amount from your rental income, and this Depreciation amount will lower your Basis in the property.

Now, let's assume that you assign a value of $25,000 to the land on which the property is sitting, and subtract that out because land is not subject to depreciation.

That leaves a Depreciable Basis in the property of $275,000 which can be depreciated over a period of 27.5 years, resulting in an annual depreciation allowance of $10,000.

After you have rented the property for 5 years and claimed $50,000 in depreciation allowance, your Basis in the property is $250,000 because you must deduct Depreciation from your Basis.

So, for property that you purchased, your Basis is the purchase price, plus costs of improvements, and minus depreciation allowed.

B = PP + CI -D, where:

B is the Basis in the property

PP is the Purchase Price

CI is the Cost of Improvements, and

D is the Depreciation allowed

For our example above:

B = 270,000 + 30,000 - 50,000

B = 250,000

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Gifted Property

If you received property as a gift, your Basis in the property will be the same as the Basis of the individual who gifted the property to you.

Inherited Property

If you inherited property, you might or might not receive a Step-Up in Basis.