# Adjusted basis

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In [tax accounting](/source/Tax_accounting), **adjusted basis** is the net cost of an asset after adjusting for various tax-related items.[1]

**Adjusted Basis** or **Adjusted Tax Basis** refers to the original cost or other basis of [property](/source/Property), reduced by [depreciation](/source/Depreciation) deductions and increased by capital expenditures.

**Example:** Michael buys a lot for $100,000. He then erects a retail facility for $600,000, then depreciates the improvements for tax purposes at the rate of $15,000 per year. After three years his adjusted [tax basis](/source/Tax_basis) is $655,000 = $100,000 + $600,000 - (3 x $15,000).

Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes. The Amount Realized – Adjusted Basis tells the amount of Realized Gain (if positive) or Realized Loss (if negative).

## Statutory definition

Section 1012 of the [Internal Revenue Code](/source/Internal_Revenue_Code) defines “basis” as a taxpayer's cost in acquiring property, except as provided in Sections 1001–1092.[2][3][4] There is also an exception or "Special rule" under section 1012 (b) for "apportioned real estate taxes."[3]

Section 1016 then lists 27 adjustments to this basis.[5] Generally, improvements to property increase basis while depreciation deductions decrease it.

## Calculation

Adjusted basis is calculated by beginning with an [asset](/source/Asset)'s original [cost basis](/source/Cost_basis), and then making adjustments. Adjusted basis is calculated as follows:

- Purchase costs (title & escrow fees, broker commissions, shipping, sales tax, etc.)

- Improvements (rehabilitation expenses & substantial repairs)

- Legal fees (to defend or to perfect title to the property, zoning costs, etc.)

- Selling costs (title & escrow fees, broker commissions, shipping, transfer fees, etc.)

Minus the costs represented by:

- [Accumulated depreciation](/source/Accumulated_Depreciation), depletion, or [amortization](/source/Amortization_(accounting))

- Casualty or theft Loss

- Other decreases to basis

### Adjusted basis

Adjusted basis is crucial for calculating capital gains and ordinary gains when an [asset](/source/Asset) is sold.

A complete list of adjustments which increase or decrease basis is found in *IRS* Publication 551, Basis of Assets.[6]

## References

1. **[^](#cite_ref-1)** Bragg, Steven (2023-06-01). ["Adjusted basis definition"](https://www.accountingtools.com/articles/adjusted-basis). *AccountingTools*. Retrieved 2023-07-26.

1. **[^](#cite_ref-2)** ["Section 1012 - Basis of Cost - Generally"](https://www.govinfo.gov/content/pkg/USCODE-2023-title26/pdf/USCODE-2023-title26-subtitleA-chap1-subchapO-partII-sec1012.pdf) (pdf). *United States government website*. October 4, 2024. Retrieved March 12, 2025.

1. ^ [***a***](#cite_ref-LII1012_3-0) [***b***](#cite_ref-LII1012_3-1) ["26 U.S. Code § 1012 - Basis of property—cost"](https://www.law.cornell.edu/uscode/text/26/1012). *Cornell Law School, Legal Information Institute*. December 19, 2014. Retrieved March 12, 2025.

1. **[^](#cite_ref-4)** ["Section 1012 - Basis of property-cost: 18 Analyses of this statute by attorneys"](https://casetext.com/statute/united-states-code/title-26-internal-revenue-code/subtitle-a-income-taxes/chapter-1-normal-taxes-and-surtaxes/subchapter-o-gain-or-loss-on-disposition-of-property/part-ii-basis-rules-of-general-application/section-1012-basis-of-property-cost/analysis?citingPage=1&sort=relevance). *Thompson-Reuters*. February 8, 2024. Retrieved March 12, 2025.[*[dead link](https://en.wikipedia.org/wiki/Wikipedia:Link_rot)*]

1. **[^](#cite_ref-5)** ["26 U.S. Code § 1016 - Adjustments to basis"](https://www.law.cornell.edu/uscode/text/26/1016). *Cornell Law School, Legal Information Institute*. August 12, 2022. Retrieved March 12, 2025.

1. **[^](#cite_ref-6)** ["About Publication 551, Basis of Assets"](https://www.irs.gov/forms-pubs/about-publication-551). *IRS official government website*. May 22, 2024. Retrieved March 12, 2025.

- [Publication 551](https://www.irs.gov/publications/p551/ar02.html)

- [Adjusted cost basis Calculator](https://www.irstaxapp.com/adjusted-basis-in-real-estate/)

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