How to Calculate Adjusted Cost Base

The adjusted cost base determines how much taxes you will pay.
The adjusted cost base determines how much taxes you will pay. (Image: Jupiterimages/Polka Dot/Getty Images)

The adjusted cost base is a calculation used to determine the cost of an asset for tax purposes. In tyhe United States the adjusted cost base is frequently used to determine the tax value of real estate held as an investment or received as an inheritance. The adjusted cost base is the cost of the house, plus improvements, minus depreciation. Jim Polson of Ohio State University called the adjusted cost base "an important consideration that affects if, when, and how much tax is paid."

Determine the original price of the property or asset. This price is not the current market value of the asset, it's the original purchase price. If the property is inherited, its original price is considered the appraised value at the time of inheritance.

List all improvements made to the property and how much they cost. The value of improvements is considered equal to the price paid for them. For example, if a house was bought for $30,000 and the owners spent $10,000 on improvements over the next two years, the new cost basis for the house would be $30,000 + $10,000 = $40,000.

List all applicable depreciation associated with the property. The rate of depreciation is determined by the IRS, and varies for different assets. Over one year, a $30,000 piece of farm equipment may be claimed to depreciate $3,000, but the amount of depreciation for a $30,000 house over the same time period may be $4,000.

Subtract the depreciation from the sum of the purchase price and improvements made to the house. For example if the depreciation claimed for the house is $4,000 then the cost basis for the house is $30,000 + $10,000 - $4,000 = $36,000.

Tips & Warnings

  • Depreciation schedules can also be affected by state and local government.
  • Tax laws can be complicated and may require professional help to properly utilize. It's best to consult a tax adviser to help determine the adjusted cost basis of an asset.

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