Adjusted basis is the cost basis of an asset adjusted for various events during its ownership. It is usually used to calculate an owner’s capital gain or loss for income tax purposes when the property is sold, or to calculate an inheritor’s tax basis when they receive property from a testator’s estate.
When adjusting basis, expenses made to maintain or improve property are usually capitalized (or added) to the original basis (purchase price) of the property. Deductions taken for depreciation and casualty losses are subtracted from the basis because they effectively reduce the property owner’s cost of ownership and the value of the property.
The following are examples of items that commonly increase the basis of property:
- Zoning costs
- The cost of extending utility service lines to a property
- Impact fees
- Legal fees for defending and perfecting title
The following examples decrease the basis of property:
- Investment tax credit
- Tax credit for qualified electric vehicles.
- Postponed gain from the sale of a home
- Insurance reimbursements for casualty and theft losses
[Last updated in June of 2021 by the Wex Definitions Team]