What is Basis?

What is the Basis & What is the basis used for?

Basis is the amount of your investment in property for tax purposes. You use the basis of property to figure the tax deductions for:

• depreciation,
• amortization
• depletion
• charitable gifts and
• casualty losses

You also use the basis to figure out the gain or loss on the sale or other disposition of property. Accurate records must be kept so that you can make these computations.

Determining the basis

The starting point for determining the basis of property you buy is usually its cost, hence the term cost basis. In addition, you can capitalize (add to basis) many direct and indirect costs. If you use property for both business and personal purposes, you must allocate the basis based on the use. Only the amount of basis allocated to the business use of the property can be depreciated.

How to increase or decrease basis?

Your original basis in property is adjusted (increased or decreased) by certain events.

If you make improvements to the property, you increase your basis.

If you take deductions for depreciation or casualty losses, you decrease your basis.

Special rules when determining the basis

You cannot always determine your basis in some assets by cost alone. Property you receive as a gift or inheritance and property received in a involuntary conversion has special rules that are used to determine basis.

Generally, the higher your basis for an asset, the less gain you will have to report to the IRS on its sale. The higher your basis in a depreciable asset, the higher your depreciation deductions will be.