Tax Basis
The cost of an asset for tax purposes, used to calculate the taxable gain or loss upon sale or other disposition.
What is Tax Basis?
Tax basis (or cost basis for tax purposes) is the starting value assigned to an asset under the tax code, used to calculate taxable gain or loss when the asset is sold, exchanged, or otherwise disposed of. For most purchased assets, the initial tax basis equals the purchase price including transaction costs. The basis is then adjusted over time: increased by the cost of capital improvements, and decreased by depreciation deductions taken. When an asset is sold, the taxable gain or loss equals the sale price minus the adjusted tax basis. Different assets have different basis rules—inherited assets receive a stepped-up basis to fair value at the decedent's date of death, gifts carry over the donor's original basis, and like-kind exchanges under IRC Section 1031 defer recognition by transferring basis to the replacement property.
Example
An investor buys a rental property for $300,000 and spends $50,000 on improvements. Over 10 years, she claims $100,000 in depreciation deductions, reducing the tax basis to $250,000 ($300,000 + $50,000 − $100,000). When she sells the property for $500,000, the taxable gain is $250,000 ($500,000 − $250,000 adjusted basis), and the depreciation recapture is taxed separately at 25%.