What's the Basis?
The tax basis of some items are often their original cost, but real estate is one type of property where the tax basis changes over time. Basis is a changing amount that indicates how much an owner has invested in a property. It affects the amount of tax you must pay when you sell the real estate.
The original tax basis equals the cost of the property plus the closing costs to acquire it. Capital improvements are one item that increase the original tax basis, but the amount of depreciation you take each year decreases it. The ongoing figure after all additions and subtractions is called the adjusted tax basis.
The adjusted tax basis is important, because when you sell the property, your proceeds are subtracted from the basis to calculate your profits, called gains, and that's the amount you must pay taxes on. Higher gains mean higher taxes.
