How to Determine Tax Basis on Real Estate

by Cynthia Myers

    When you sell real estate, you may owe capital gains tax on any profit you realize from the sale. Your profit is based not on the sale price of the property but on the difference between the sales price and your basis in the property. Correctly figuring your basis helps you avoid paying unnecessary taxes. You’ll also need to know the basis in your property to correctly figure depreciation or a casualty loss if the property is destroyed.

    Cost

    Use the price you originally paid for the property as the starting point for figuring your basis. Include not only the selling price of the property but any sales taxes you paid, real estate taxes owed by the seller that you paid as part of the initial sale, legal fees, recording fees, cost of a survey and other settlement charges. If you inherited the property, your basis is the fair market value of the property on the date of death of the person who left the property to you.

    Improvements

    Improvements you make that increase the value of the property add to your basis. If you add a bedroom or bathroom, remodel the kitchen, install solar panels on the roof, pave the driveway or install professional landscaping in the yard, you’ve spent money to increase the value of the home and you get to add the amount you spent to your basis. If your home is damaged in a fire, hurricane or other disaster, the money you spend to restore the home to its original condition also becomes part of your basis.

    Costs Not Included

    Not every penny you spend on the property adds to its basis. Money spent on routine upkeep, such as cleaning and painting, doesn’t count toward your basis. Repairs needed to keep the home in good shape, such as fixing a leak in the roof, also don’t count. You also can’t include costs that you don’t pay for. For instance, if your house is damaged by a tornado and your insurance company pays for all the repairs, the cost isn’t part of your basis.

    Deductions

    In some cases, you’ll have to deduct sums from your basis to arrive at the correct figure. For instance, if you took depreciation for an office in your home on your income taxes, you can’t include this amount in your basis. If you received a subsidy for an improvement you made to your home, you can’t include that amount as part of your basis. If your utility company paid you a subsidy for installing solar panels on your roof, you’ll need to subtract the subsidy from the basis after you’ve added in the cost of installing the panels.

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    About the Author

    Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.

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