Basis, The Number That Follows A Property

Basis is the least visible number in property ownership and one of the most consequential. It accumulates quietly across years and determines the tax outcome at sale.

Where basis starts

Initial basis is generally the cost of acquiring the property, including the purchase price and certain acquisition costs such as legal fees and transfer levies.

Not every closing cost is added to basis. Some are treated as immediately deductible and some as loan costs, each with different treatment.

The purchase price also has to be allocated between land and building, because land is generally not depreciable and the split affects deductions for the entire hold.

What increases it

Capital improvements add to basis. Work that adds to the property, extends its life or adapts it to a new use is generally capitalised rather than deducted.

Because these additions accumulate over many years, the record has to be kept over the same period, and reconstructing it later is difficult.

This is the practical reason to retain invoices and permits for the whole ownership period, since they are the evidence supporting the eventual calculation.

What reduces it

Depreciation deductions reduce basis by the amount claimed each year, which is why a long-held property can have a basis far below what was paid.

In many systems, basis is reduced by depreciation that was allowable whether or not it was actually claimed, so failing to take deductions does not preserve basis.

Certain other events, including some insurance recoveries and casualty losses, also adjust basis, each under its own set of rules.

Why the calculation matters at sale

Gain is measured against adjusted basis rather than against the price originally paid, so the accumulated adjustments determine the taxable amount directly.

Two owners selling identical properties at identical prices can face very different liabilities depending on how long each held and what each claimed.

Debt does not enter the calculation, which is why the tax due can bear little relation to the cash a sale actually produces.

Basis in transfers other than purchase

Property acquired by gift, by inheritance, through an exchange or by contribution to an entity may carry a basis determined by rules other than cost.

Those rules differ substantially between situations and between jurisdictions, and they can produce a basis very different from the property's current value.

Because the treatment is technical, varies by jurisdiction and changes over time, establishing basis in any non-purchase transfer is a matter for a qualified adviser.