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