Types of Cost Basis

Cost basis can be applied to different assets such as personal properties, stocks and bonds, and real estate properties. Cost basis is adjusted (increased or reduced) in figuring out capital gains or losses.

Property 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:

1. sales tax charged on the purchase (exception: 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 form 1040). If  you make that choice you cannot include those sales taxes as part of your cost basis.
2. Freight charges to obtain the property
3. installation and testing charges
4. excise taxes
5. legal and accounting fees (when they must be capitalized)
6. revenue stamps
7. recording fees, and
8. real estate taxes (if assumed for the seller)

Cost basis for Stocks and bonds

The cost basis of stocks and bonds is generally the purchase price + 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 or exchange mutual fund shares, you may use an average basis if:

1. you acquired the shares at different times and prices, and
2. you left the shares on deposit in an account kept by a custodian or agent

Cost basis of Real property

Real property also called real estate is land and generally anything built on, growing on, or attached to the land. If you buy a real estate property, certain fees and other expenses you pay are part of the cost 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. You must allocate your cost basis between land and improvements such as buildings, to figure allowable depreciation of the improvements. Allocate the costs according to the fair market values of the land and improvements at the time of the purchase. Land is not depreciable property.

Cost basis of Business assets

If you purchase property to use in your business, your basis is usually its actual cost to you. However if you construct, build, or otherwise produce property, you may be subject to the uniform capitalization rules to determine the basis of the property. Under the uniform capitalization rules, you generally must capitalize direct costs and an allocable part of most indirect costs incurred due to production or resale activities. You must include certain expenses you have during the year in the basis of property you produce or in your inventory costs, rather than deduct them as a current expense. You recover these costs through depreciation, amortization or cost of goods sold when you use, sell or otherwise dispose of the property.