Basis - Introduction

Original Basis
Original basis, or often referred to simply as "basis," is defined as a taxpayer's investment in any asset or property right. Basis is a starting point used to determine a breakeven or realized gain or loss on the sale of property.

Adjusted Basis
Adjusted basis is a property's original basis adjusted for certain material improvements or decreases to the basis. The table below lists common additions and decreases to a basis:

Additions to Basis
Decreases to Basis
Capital Improvements
Depletion Allowances
Sales Tax
Return of Capital
Losses from Casualty and Theft
Depreciation, Amortization, ACRS deductions
Unharvested Crops on land sales
Cancelled Debt excluded from Income
Assessments for Local Improvements
Amortized Bond Premium

Capital Improvements and Losses from Casualty and Theft are two of the more common adjustments to an original basis. Capital improvements would increase the original basis and include items such as: adding a room, replacing your roof, building a yard fence, replacing air conditioning, new plumbing and paving a driveway. Casualty and theft losses would decrease the original basis for instances such as: insurance awards, payments in settlement of damages to your property and deductible casualty/theft losses not covered by insurance.

Not considered improvements: General repairs and maintenance, real estate taxes and normal business expenses. Repairs are always deducted as expenses, so they never affect the basis.

Amortization and Accretion
Amortization is the deduction of capital expenses over a specific period of time and it typically applies to intangible assets such as patents, trademarks, copyrights and franchise licenses. These costs generally fall under the "Section 197 intangible" asset code, which allows them to be amortized (taken as a deduction) over a 15-year period. Because the taxpayer gets a deduction for property depreciation and amortization over the life of the asset, the cost basis must be adjusted downward as well to reflect this.

Accretion is an increase in value by internal growth or acquisitions and mergers. If new property is purchased to increase the productivity, growth or expansion of the business, it would be considered an "addition to the property," which allows the basis of the newly acquired asset to be added to the original cost basis of the original property.

Amortization and Accretion
Related Articles
  1. Personal Finance

    How the Social Security Reboot May Affect You

    While there’s still potential for some “tweaking” around your Social Security retirement benefits, I’d like to share some insight on what we know now.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Entrepreneurship

    Creating a Risk Management Plan for Your Small Business

    Learn how a complete risk management plan can minimize or eliminate your financial exposure through insurance and prevention solutions.
  4. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  5. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  6. Active Trading

    10 Steps To Building A Winning Trading Plan

    It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
  7. Trading Strategies

    How to Trade In a Flat Market

    Reduce position size by 50% to 75% in a flat market.
  8. Credit & Loans

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  9. Chart Advisor

    Is This The Beginning Of A Downtrend In Home Builders?

    Falling lumber prices and weakness on the charts of home builders suggest that the next leg of the trend could be downward.
  10. Professionals

    'Man Up': 3 Tips for Working with Male Clients

    Male clients aren't always financially literate. Here's how advisors can meet their needs.
  1. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  2. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  3. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  4. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  5. Gross Exposure

    The absolute level of a fund's investments.
  6. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  3. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  4. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
  5. Do financial advisors work only in banks?

    While the majority of financial advisors work for financial institutions such as banks, a large proportion of them are self-employed ... Read Full Answer >>
  6. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center