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
Commissions
Losses from Casualty and Theft
Freight
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
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