Question: I have considered selling my investment real estate, but I am concerned about my basis in the property. What does basis mean? How is it calculated? And why should I care?
Answer: (Your basis depends on the type of property and how it was acquired. Assume here that it is investment real estate acquired by purchase.) Your basis is what you paid for the property (the sum of all cash, mortgages, or other consideration) plus costs and fees relating to the purchase. Your basis is increased by the value of any capital improvements made during ownership (including assessments paid) and isdecreased by depreciation and any partial sales of property or rights (e.g., lot splits, easements given, mineral rights conveyed). This result becomes your adjusted basis.
A good commercial agent will ask you about the adjusted basis in your property. This is important because it is a crucial number in the calculation of your capital gains tax due if the property were sold for cash. Your capital gain is determined by subtracting the adjusted basis from the net proceeds of the sale. Understanding the tax consequences of a prospective sale is necessary when evaluating your selling options. If you are considering selling or trading your property or if you would just like to know what your adjusted basis and potential capital gains tax would be, contact James Maxfield for a free consultation.