What is Cost Basis?

Below is the cost basis definition as well as information about different cost basis, uses of cost basis and how to calculate each cost basis.

What is basis or cost basis?

Basis or cost basis is the amount of your investment in property for tax purposes. Taxpayers use the basis of property to figure out the deductions for:

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

The cost basis is also used to figure out capital gain and loss on the sale or other disposition of property. When claiming any tax benefits relating to capital gains and losses, accurate records must be kept.

How to calculate the cost basis?

The basis of property you buy is usually its cost. In addition if you use the asset in a business or an activity conducted for profit, you can capitalize (add to the cost basis) many direct and indirect costs. If you use property for both business and personal purposes, you must allocate the cost basis based on the use. Only the amount of basis allocated to the business use of the property can be depreciated.

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 decease your basis.

Sometimes you cannot determine your basis in some assets by cost alone. Property you receive as a gift or inheritance and property received in an involuntary conversion has special rules and are use to determine the basis.

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