How the IRS Defines Basis
The main reason why it’s important to understand “basis” as an IRS term is because it affects the taxes you pay in relation to property ownership. Whenever you sell, exchange, or give away property, the amount of your capital investment in the property must be accounted for. Put simply, basis is how the tax code defines the cost of your property. Real estate sales can affect your tax basis.
That basis figure is then used to calculate depreciation, amortization, depletion, casualty losses, and any gain or loss in the property transaction. This could be selling the property, exchanging property, or any other disposition of the property. All of those situations will require a number for your property tax basis in order to determine how to handle specific aspects of your upcoming tax return.
The 3 Types of Basis for Your Taxes
Knowing that basis relates to the cost of your property, it’s sometimes helpful to dive a little deeper and look at the various types of basis that the IRS needs to reference. The following types of basis will clear up the meaning of tax basis.
Cost Basis
When the IRS talks about the “cost basis,” they aren’t just considering what the item cost. The cost basis also includes sales tax paid, freight, legal fees, installation, and other fees that might have been paid in the purchase of the property. This can be very detailed!
For example, when someone acquires a business, the cost basis often needs to be allocated to each one of the assets in the business to determine their actual basis in connection to the purchase price. That’s why it’s helpful to hold on to records for major transactions. Knowing how to apply costs to your basis can help reduce taxes when you sell or dispose of the property down the road.
Adjusted Basis
Have you made any major improvements to your home recently? Understanding your adjusted basis could help you when it’s time to sell. A common example of adjusted basis is when you’ve made capital improvements to a property. Selling, exchanging, or disposing of that property may require you to adjust its basis to make sure that those upgrades are included, whether that’s a roof replacement, adding a new room, or other smaller improvements.
It’s worth noting, though, that adjusted basis can sometimes decrease the value of property. This can happen because of theft losses. Running the numbers for all aspects of your property’s value can help you anticipate what your capital gain might be when you sell!
Basis Other Than Cost
You might also be in a situation where you receive property for services or as a gift. In most cases, the basis will be determined by the item’s fair market value. However, there are special basis rules for inherited property, like-kind property exchanges, and property transferred to a spouse. Reviewing your circumstances is always crucial for establishing basis. You don’t want to end up owing more on your taxes than what’s fair. A quick conversation might be all you need to get back on track.
Got Questions About Tax Terminology? We Can Help!
The tax code is complex and ever-changing, so it’s always nice to know that you don’t have to work through your questions on your own. Whenever you have questions about tax terminology or how to handle the sale or purchase of property, please know that we can help!
NSO & Company is proud to serve small businesses, families, and individual taxpayers throughout the state of Indiana and beyond. We’re based in Fishers, Indiana and are always just a phone call away: (317) 588-3131.
Frequently Asked Questions
Our clients appreciate our fair, transparent pricing — no surprise fees, no confusing invoices. Individual tax returns start at $750, and business returns start at $1,500. If you’d like to talk through your specific situation before committing, a one-hour consultation with a CPA and tax preparer is $250.
Every client’s needs are different, so these starting rates can vary based on the complexity of your return or the scope of services you need. Visit our pricing page for more detail.
If you need accounting, bookkeeping, or tax services, contact us today — we’d love to learn more about your situation and provide pricing tailored to your needs.
We work with a wide variety of individual and business clients across central Indiana. Our clients range from entrepreneurs and small business owners to business professionals, retired individuals, families, and business corporations of all sizes.
Whether you’re just starting a business, managing personal and family finances, planning for retirement, or running an established company, we tailor our accounting, tax, and advisory services to fit where you are and where you’re headed. No two clients are exactly alike, and neither is our approach — we take the time to understand your specific situation so we can offer advice that actually applies to you.
NSO and Company is located in Fishers, Indiana, just off I-69 near the intersection of Lantern Road and 96th Street — an easy, convenient drive from anywhere in the Indianapolis area. Our office is at 8950 Fitness Lane, Suite 100, Fishers, IN 46037.
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NSO and Company combines years of experience with personalized service to help individuals and businesses prepare their taxes accurately and on time. We take the time to understand your situation, answer your questions, and look for opportunities to help you maximize your tax savings, while staying compliant and making the process as smooth as possible. Our clients also value our fair pricing and the confidence that comes from working with a trusted local firm.
