Question

What amount realized is made up of the money and FMV of the property received plus taxpayer’s debt assumed by the buyer less costs of sale.. How is the Adjusted basis determined? Please cite an example.

Answer 1

Adjusted basis refers to how much you lose or gain when you sell property. Before you can determine your profit or loss from the sale or exchange of property, you must factor in things such as depreciation or money you invested in improvements to the property prior to selling it.

The “basis” of a piece of property is simply the cost to you of purchasing it. This includes the ticket price, the sales tax, other taxes and any associated fees. To determine adjusted basis, start with the original purchase price and add amounts based on things such as improvements made or legal fees paid and subtract deductions taken for things such as depreciation or loss.

The adjusted basis is calculated by taking the original cost, adding the cost for improvements and related expenses and subtracting any deductions taken for depreciation and depletion.

Example:-

Say you buy a $150,000 home, paying $25,000 in cash and getting a $125,000 mortgage. When determining the basis, start with this $150,000 and add any associated fees such as real estate taxes the seller owed that you paid as part of the transaction. This figure is your basis.

To get your adjusted basis, add or subtract any associated costs or credits. Say, if you invested $50,000 in home renovations, add this $50,000 to the basis to get an adjusted basis of $200,000. If you had storm damage to your home and had to pay $5,000 for roof repairs, add this amount to get an adjusted basis of $205,000.