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How to Calculate Adjusted Basis

When evaluating the investment potential of a property, there are many important factors to consider. One that is sometimes overlooked is the adjusted cost basis. This calculation will help you determine the property’s value and the potential profit from its sale.

The following guide provides a look at the difference between cost basis and adjusted basis and provides a simple overview of the calculation method. Once you understand these details, you’ll be better equipped to choose investment properties that are most likely to meet your needs.

What is Cost Basis?

The term cost basis refers to the total purchase price of a property combined with the realtor commissions and other closing costs. When a property is sold, the cost basis (sometimes just called “basis”) is used to calculate your taxable gain or loss.

If the sale price is above the basis, it creates a gain, and when it’s below, you have a loss. Generally, a high-cost basis results in a smaller gain or a greater loss.

The use of financing on a property’s purchase does not affect its cost basis. However, your closing costs adjust the basis upwards. You can find your closing expenses listed on your closing statement. There may also be some additional costs that are not listed, so check with your tax professional to ensure you’re using the correct amount.

Cost Basis vs. Adjusted Basis

Cost basis is calculated based on the purchase transaction. However, as you hold the property, the basis is adjusted. The formula for adjusted cost basis is the original cost basis increased by capital expenditures and reduced by your depreciation deductions.

While routine repairs and maintenance do not result in adjustments to the basis, capital improvements, such as adding a new room, adjust the basis upward by the cost of the improvement. In addition, you are permitted to adjust your basis downward based on the building’s tax depreciation and by the amount of any property casualty or theft losses.

To accurately determine a property’s value, it’s important to factor in all of the additional costs and depreciation you incur over the lifetime of your property ownership. Following is a closer look at how the calculation works.

How to Calculate Adjusted Basis

To calculate a property’s adjusted basis, follow these three simple steps:

  1. Begin With Your Original Investment in the Property

  2. Add the Cost of Major Improvements

  3. Subtract Allowable Depreciation and Casualty and Theft Losses

Being able to do this accurately requires you to understand which expense to include and whether they increase or decrease your basis.

Costs That Increase Your Basis

  • Acquisition costs – surveys, transfer fees, title fees, etc.

  • Cost of additions or capital improvements made to the property

  • Utility installation expenses

  • Property-related legal fees

  • Costs to restore damage from fire, theft, flooding, or other casualties

  • Post-2005 home energy improvement tax credits

Costs That Decrease Your Basis

  • Depreciation on business or rental properties

  • Insurance reimbursements following a theft or casualty loss

  • Casualty loss deductible that wasn’t covered by insurance

  • Income received for granting an easement

  • Gain on sales of a home sold before May 7, 1997

Calculation Example

Assume you purchased a home for $600,000 and had closing costs of $13,500. While you owned the home, you put $200,000 into improvements, which increases your basis.

In this case, your adjusted basis is:

$600,000 + $13,500 + $200,000 = $813,500

If you sold the property for $1 MM and had $50,000 in closing costs, your sales proceeds would be:

$1,000,000 - $50,000 = $950,000

To calculate your capital gain, subtract your adjusted basis from your sales proceeds:

$950,000 - $813,500 = $136,500

Capital Gains Deferral

Once you’ve calculated your potential capital gains and considered the taxes you could owe on the sale of the property, you may wish to consider a 1031 exchange. This allows you to defer paying capital gains taxes on your property sale by using the proceeds to purchase a like kind replacement property. Under IRS guidelines, this could be a physical property or a Delaware Statutory Trust (DST). Many investors appreciate the passive nature of a DST investment and find it to be a suitable replacement property.

Obtaining Additional Basis During a 1031 Exchange

If an investor acquires replacement properties with greater debt, they will gain additional basis that may allow them to increase their after-tax income.

For example, if an investor has sold a property with no loan on it for $1 million in net proceeds and decides to invest in a portfolio of DSTs having an average loan to value of 50%, they will end up acquiring DST property interests valued at $2 million ($1 million of equity + $1 million of debt).

The additional $1 million of property interests acquired will increase the total basis held by the investor and provide higher depreciation deductions that can shelter/reduce taxable income and generate higher after-tax cash flow.

There are additional trade-offs to consider when using additional debt that should be discussed with a knowledgeable tax advisor.


To learn more about 1031 exchanges and DST investments, please contact our team. We’ll provide you with a consultation and can refer you to a tax professional who can assist with your adjusted cost basis calculations.

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Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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