Cost Basis

Cost basis definition (What is cost basis?)

The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations or in other property. your cost also includes amounts you pay for:

• sales tax charged on the purchase

(For tax years beginning after 2003, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A. If you make that choice, you cannot include those sales taxes as part of your cost basis.)

• Freight charges to obtain the property

• Installation and testing charges

• Excise taxes

• Legal and accounting fees (when they must be capitalized)

• Revenue stamps

• Recording fees and

• real estate taxes (if assumed for the seller)

Cost Basis of Stocks and Bonds

The basis of stocks and bonds is generally the purchase price plus any costs of purchase or sale such as any commissions and recording or transfer fees. You reduce your basis when you receive nontaxable distributions. If you sell mutual fund shares you acquired at various times and prices and left the shares on deposit in an account kept by a custodian or agent, you can elect to use an average basis.

Cost Basis of Real Property

Real property also called real estate, is land and generally anything built on, growing on, or attached to land. If you buy real property, certain fees and other expenses you pay are part of basis in the property. For example, you can include as part of your basis real estate taxes you agree to pay that were owed by the seller, certain settlement fees and closing costs and expenses you pay for the construction of nonbusiness property.

If you use the property for business or rental purposes, you must allocate your cost basis between the land and the building to figure the allowable depreciation. Allocate the costs according to the fair market values of the land and building at the time of purchase. Land is not a depreciable property.

Business Assets

If you purchase property to use in your business, your basis starts with the actual cost to you. To the other costs you can also add settlement fees and closing costs. You recover your costs through depreciation or amortization.