What is 'Unadjusted Basis'

Unadjusted basis refers to the original cost to purchase an asset. This amount includes not only the initial price the purchaser paid to acquire the asset, but also includes other costs such as expenses and liabilities assumed to purchase it. Adjusted basis is a related term, and refers to any adjustments made to the original purchase price of an asset over time. Unadjusted basis is used mostly in accounting nomenclature, and is akin to the concept of cost basis.

BREAKING DOWN 'Unadjusted Basis'

Unadjusted basis is the initial value assigned to an asset. It includes the cash cost or price of an asset, any liability assumed to acquire the asset, any asset the purchaser gave to the seller as part of the transaction and any purchase expenses incurred to acquire the asset. Purchase expenses may include commissions, fees, survey costs, transfer taxes or title insurance, for example.

Example of Unadjusted Basis

Sam purchased a building from Emily using $100,000 in cash and a $50,000 mortgage. As part of the purchase agreement, Sam also paid $1,000 in property taxes attributed to a period of time in which Emily was still the owner of the property. Total closing costs and fees for Sam to purchase this property were $4,000. Sam's unadjusted basis for this property is $100,000 + $50,000 + $1,000 + $4,000 = $155,000.

Unadjusted Basis in Practice

The unadjusted basis is used to calculate the gain on the sale of an asset. Extending Sam's purchase example above, assume Sam later sold this piece of property for $175,000, after costs and fees associated with the sale. He could determine his return on investment by calculating the profit on the investment. He earned $20,000 ($175,000 - $155,000) net of expenses on this investment, which equates to a 12.9% return on investment (($175,000 - $155,000)/$155,000).

Unadjusted basis is also the starting point for determining depreciation on an asset, such as a plant or piece of manufacturing equipment, in accelerated depreciation methods. Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life, and is used to account for declines in the value of the asset over time. Accelerated depreciation methods allow the deduction of higher expenses from the unadjusted basis in the first years after purchase and lower expenses as the depreciated item ages.

  1. IRS Publication 551 - Basis Of ...

    A document published by the Internal Revenue Service (IRS) that ...
  2. Depreciation

    Depreciation is an accounting method of allocating the cost of ...
  3. Fully Depreciated Asset

    A fully depreciated asset is a property, plant or piece of equipment ...
  4. Accumulated Depreciation

    Accumulated depreciation is the cumulative depreciation of an ...
  5. Business Asset

    A business asset is a piece of property or equipment purchased ...
  6. Long-Term Assets

    Long-term assets are the value of a company's property, equipment ...
Related Articles
  1. Personal Finance

    Rising Mortgage Rates Starting to Pressure Property Values

    Rising mortgage rates are starting to affect property values, albeit only slightly.
  2. Financial Advisor

    How Does Depreciation Reduce My Tax Bill?

    How the depreciation tax rule can assist real estate investors.
  3. Investing

    How Depreciation Works on a Rental Property

    One of the advantages of owning rental real estate is the depreciation tax deduction.
  4. Investing

    Despite Mortgage Rate Increase, Housing Remains Affordable

    Based on First American Financial's November Real House Price Index, housing remains affordable.
  5. Personal Finance

    First-Time Buyers Get Mortgage Rate Reprieve for Now

    First-time buyers are getting a reprieve from rising mortgage rates, but it's not expected to last long.
  6. Personal Finance

    Rising Mortgage Rates Do Not Deter Home Searches

    Rising mortgage rates, even if they hit more than 5%, won't deter most homebuyers from searching for a home to purchase.
  7. Taxes

    Filling out Form 4562, step-by-step

    Step-by-step, how to fill out the depreciation and amortization form for your business tax return.
  8. Investing

    What You Should Know About Real Estate Valuation

    Accurate real estate valuation is important to mortgage lenders, investors, insurers, and buyers and sellers of real property.
  9. Investing

    Use Real Estate To Put Off Tax Bills

    Find out how you can build wealth and reduce your taxes.
  10. Taxes

    A Tax Primer for Homeowners

    Go beyond interest and find out how mortgage points affect your taxable income.
  1. Why is accumulated depreciation a credit balance?

    Accumulated depreciation is the cumulative depreciation of an asset that has been recorded. Accumulated depreciation increases ... Read Answer >>
  2. What is the difference between CAPEX and OPEX?

    In this article, we'll teach you the differences between a company's capital expenditures and its operational expenses. Read Answer >>
  3. What are some examples of the main types of capital expenditures (CAPEX)?

    Learn about different expenses with acquiring assets that are considered capital expenditures and should be depreciated over ... Read Answer >>
  4. What is the tax impact of calculating depreciation?

    Understand the tax implications of a company's depreciation. Learn how differences in accounting methods change the amount ... Read Answer >>
Trading Center