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. Mutual Funds & ETFs

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Personal Finance

    How To Choose A Financial Advisor

    Many advisors display similar skillsets that can make distinguishing between them difficult. The following guidelines can help you better understand their qualifications and services.
  4. Professionals

    The Best Schools for Financial Planning

    Among the best universities for financial planning are the University of Georgia, Boston University, The College of Financial Planning, Texas Tech, San Diego State, Baylor, Fairleigh Dickinson ...
  5. Investing Basics

    Hiring a Financial Advisor? Look for the CFP Label

    Don’t skimp on the CFP designation. Here's why those three letters show that someone is qualified in financial and investment planning.
  6. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  7. Investing

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  8. Mutual Funds & ETFs

    Finding Lower Risk, Higher Return Mutual Funds

    Discover detailed analysis of lower-risk, higher-return balanced mutual funds, and learn about the characteristics of this type of mutual fund.
  9. Investing

    Yellow Light Trade Risk Management

    Being in the stock market for so long I tend to look at the world through the eyes of a trader, but how to decide when we are presented with two options?
  10. Investing Basics

    Do You Have What it Takes to Start a Hedge Fund?

    So you want to start your own hedge fund? Here's what it takes.
  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. 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 >>
  2. 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 >>
  3. 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 >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  6. How does being overweight in a particular sector increase risk to a portfolio?

    An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a downturn in that ... Read Full Answer >>
Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!