1. What is Adjusted Cost Basis?

Adjusted Cost Basis represents the total cost of an asset for tax purposes, accounting for improvements and depreciation. It's used to calculate capital gains or losses when the asset is sold.

2. How Does the Calculator Work?

The calculator uses the Adjusted Cost Basis formula:

Where:

• \( \text{Original Cost} \) — Initial purchase price of the asset
• \( \text{Improvements} \) — Capital improvements made to the asset
• \( \text{Depreciation} \) — Accumulated depreciation claimed on the asset

Explanation: This formula adjusts the original cost basis to reflect changes in the asset's value over time due to improvements and wear/tear.

3. Importance of Adjusted Cost Basis

Details: Accurate calculation of adjusted cost basis is crucial for determining taxable gains or losses when selling assets, ensuring proper tax reporting and compliance.

4. Using the Calculator

Tips: Enter original cost in dollars, improvements in dollars, and depreciation in dollars. All values must be non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What qualifies as an "improvement"?
A: Improvements are capital expenditures that add value to the property, extend its life, or adapt it to new uses (e.g., room additions, roof replacement).

Q2: How is depreciation calculated?
A: Depreciation is typically calculated using IRS-approved methods and schedules based on the asset's class life and recovery period.

Q3: When is adjusted cost basis used?
A: Primarily used when calculating capital gains tax upon the sale of investment property, business assets, or rental property.

Q4: Are repairs considered improvements?
A: No, routine repairs and maintenance that keep the property in normal operating condition are not considered capital improvements.

Q5: What if I inherit property?
A: For inherited property, the cost basis is typically "stepped up" to the fair market value at the date of death, which becomes your new basis.