Our complex IRS code requires that your, as a real estate investor, accurately calculate your "basis" in investment property when reporting a gain or loss on a tax return. Your monetary gain or loss when you sell investment property is determined by comparing the sale price to the adjusted basis in the property. Your original basis is determined by the way the property was acquired — whether through purchase, in trade, or received as a gift or inheritance. We will briefly cover how you determine basis in an investment property you have purchased. The original basis is determined by adjustments in the totalcost of the purchase. The adjustments include depreciation, or additions, such as capital 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 new basis 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 deductions to the original basis have been made. The basis of purchased property is the purchase price plus other expenses such as installation of upgrades, option premiums paid, and other expenses of buying the property. The basis of land includes the purchase price plus legal and recording fees, abstract fees, survey costs, and payments for non-depreciable permanent improvements. When property is improved the basis is the total cost of the construction. This cost is not taken as an expense in the year of construction. The cost becomes the basis of the property. Depreciation is calculated on the property's basis. When sell your investment property an Adjusted Basis is used in calculating capital gain or loss. Adjusted basis reflects increases or decreases in the value of the property during the period you owned it. Increases in basis come from improvements that add to the property's value. Decreases in basis come from depreciation, casualty loss, and other reductions in the value of the property. Adjusted basis is not a result of inflation and change in the market value of your property. They would only effectmarket value. Increases in basis come from improvements to your property that have a useful life of more than one year. Generally the cost of improvements which add to the basis include supplies and materials 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: http://www.irs.gov/pub/irs-pdf/p551.pdf

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