The Basis of an asset is required to calculate the capital gain.

The basis of a property is essential in calculating the capital gain of the property upon sale and it is referred to as:

Cost basis

Adjusted cost basis

book value

and just plain basis.

For the most part, unless you have "exchanged" into a property, basis is defined as follows:

Original Cost + Capital Improvements - Allowable Depreciation

Again, the reason basis is an important tax concept is that it is used to calculate the capital gain, and when you dispose of the property, with a few exceptions, you are taxed on the capital gain.

From an income tax perspective , it is generally in your best interest to have a high basis, while it is in the government's interest that your basis be low (lower basis results in a larger capital gain).

Non-recurring closing costs are usually additions to basis (save that closing statement) as are improvements to the property.

Depreciation ("theoretical" and used for investment property and not personal use property) reduces the basis. Annual deductions for depreciation you take over the holding period of a property lower the basis and the result is that you are taxed on that amount (as well as any appreciation) upon sale of the property.

Example: You purchase an asset for $100,000.00. You depreciate it

$2,500.00 per year for 10 years. Your basis is reduced by $25,000.00 ($2,500.00 X 10 years) and is now $75,000.00. If you sell the property for what you paid for it, $100,000.00, IRS says you have a capital gain of $25,000.00 and must pay tax on the $25,000.00.

Other Aspects of Basis:

A. Basis of a gift is the donor's basis or the fair market value, whichever is LESS.

B. Basis upon inheritance is the fair market value at death. (It may be better, from a tax perspective, to will your property to your heirs rather than give it to them prior to your death...after you examine the annual and lifetime gift tax exclusion)

C. Basis for an asset purchased as "community property" in community property states allows a totally new basis for the survivor equal to the fair market value at the date of death (that is, both the interest of the decedent and the interest of the survivor are "stepped up"). This causes the entire appreciation to the date of death to be free of income taxes if the property is sold at the death of the first spouse. Any appreciation or depreciation after the death of the first spouse would be taxed upon sale unless the asset passes to heirs at the death of the second spouse, and then there is again an "elevated basis."

D. Joint Tenancy - Carries the "right of survivorship" and normally, only the interest of the decedent has a new or "Stepped up" basis. Thus, when property is owned with one's spouse as a Joint Tenant, the basis after death to the survivor will be one half (1/2) of the original cost (as to the survivor's portion) and one half (1/2) of the value at death (as to the portion received from the decedent). This could mean that only one half

(1/2) of the appreciation to the date of death is free of income tax to the surviving spouse.

In bold type in our California purchase agreement I remember the phrase:

"The manner of taking title may have significant legal and tax consequences therefore give this matter serious consideration."

Saul