Tax Facts

8610 / How is tax basis adjusted and how does it impact the computation of capital gain or loss?

As discussed in Q 8609, gain or loss is measured by determining whether the amount received in a sale or exchange of property was more or less than the taxpayer’s “basis.” If the amount received is more than basis, there is a taxable gain. Conversely, if basis is greater than the amount received there is a loss. However, during the period of a taxpayer’s ownership of property, certain adjustments to the original tax basis are required. Thus, tax basis, as adjusted, is referred to as “adjusted basis.”
In the course of a taxpayer’s ownership of property, basis can be increased or it can be decreased.

Capital Improvement



Example: Asher purchases a 10 story office building for $500,000. Subsequently, Asher decides to add an 11th story to the building at a cost of $100,000. As a capital improvement, Asher’s original $500,000 basis is adjusted upward to $600,0001 and becomes the adjusted basis in the building.

Depreciation


Generally, depreciation is a means of deducting the cost of an asset over its useful life. For example, the cost of a commercial building (excluding land, which is not depreciable) is depreciated over a useful life of 39 years.2 Based on a tax fiction, at the end of the 39 year depreciation period, the building will be completely “used up” and worth nothing. Therefore, every year, the basis of the building is adjusted downward by the amount of that year’s depreciation deduction.3
Example: Asher purchases a 10 story office building for $390,000.4 Because the building is depreciable over 39 years, Asher claims a $10,000 depreciation deduction each year. After nine years, Asher’s original basis is adjusted downward to $300,000 ($390,000 minus $90,000). At that time, if Asher were to sell the building for $400,000, he would have a taxable gain of $100,000 ($400,000 minus $300,000).





1.  IRC § 1016(a)(1).

2.  IRC § 168(c).

3.  IRC § 1016(a)(2).

4.  For purposes of this example, the amount of the purchase price attributable to the land is ignored.


Tax Facts Premium Tools
Calculators
100+ calculators specifically designed to help you easily assist clients with specific planning situations and calculations.
Practice Guidance
Designed to help you discover new ways for which to build and maintain client relationships.
Concepts Illustrated
Specifically designed to help you easily assist clients with specific planning situations and calculations.
Tax Facts Archives
Access to the entire library of Tax Facts dating back to 2012 allowing you to look up the exact tax figures from prior years.