1. What is Tax Basis?

The tax basis of a house is the amount of your investment in the property for tax purposes. It's used to determine gain or loss when you sell the property and affects depreciation calculations for rental properties.

2. How is Tax Basis Calculated?

The standard formula for calculating tax basis is:

Where:

• Purchase Price — The amount you paid for the property
• Closing Costs — Fees paid at closing (title insurance, recording fees, etc.)
• Improvements — Capital improvements that add value to the property
• Depreciation — Accumulated depreciation (for rental properties)

3. Importance of Tax Basis

Details: Your tax basis determines your capital gains when you sell the property. A higher basis means less taxable gain. It's also used to calculate depreciation deductions for rental properties.

4. Using the Calculator

Tips: Enter all amounts in USD. Include all capital improvements but exclude routine maintenance. For rental properties, include accumulated depreciation.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between cost basis and tax basis?
A: They're often used interchangeably, but tax basis can be adjusted over time (through improvements or depreciation).

Q2: Are all closing costs included in tax basis?
A: Only closing costs that would be capitalized (title fees, transfer taxes) not deductible expenses (mortgage interest at closing).

Q3: What counts as an improvement?
A: Improvements that add value, prolong life, or adapt to new uses (new roof, addition) - not repairs (painting, fixing leaks).

Q4: How does depreciation affect basis?
A: For rental properties, depreciation reduces your basis each year, which increases taxable gain when you sell.

Q5: Is land included in the tax basis?
A: Yes, but land isn't depreciable. You should allocate purchase price between land and building.