How Do I Calculate Cost Basis for Real Estate?

 

If you own property that you need to account for in your return, H&R Block can help you figure out how to calculate cost basis for the real estate you own.

First, it’s important to know that basis is the amount of your capital investment in a property and is used for tax purposes. To find the adjusted basis:

  1. Start with the original investment in the property.
  2. Add the cost of major improvements.
  3. Subtract the amount of allowable depreciation and casualty and theft losses.

How to Determine the Original Investment in the Property

How you determine the original investment in the property can vary. In most cases, the basis is the asset’s cost. The cost includes sales tax and other expenses for the purchase. Review the list below for other cases and how to calculate the cost basis for real estate.

  • For inherited property, the basis is the fair market value (FMV) at the date of death.
  • For gifted property, the basis depends on any gain or loss when you sell the property:
    • When there’s a gain, the basis is the donor’s adjusted basis.
    • When there’s a loss, the basis is the lesser of the donor’s adjusted basis, or the FMV at the time of the gift.
  • For property that has changed from personal to business use, the basis used to calculate depreciation (i.e. the depreciable basis) is generally the lesser of adjusted basis or FMV of the property at the time of conversion. When you sell the property, the basis reported on your tax return depends on whether the property is sold at a gain or loss:
    • When there’s a gain, the basis is your adjusted basis when you sell the property.

When there’s a loss, the basis for the purposes of calculating the allowable loss is the lesser of the adjusted basis (i.e. cost minus depreciation) or remaining depreciable basis (i.e. the FMV at the time of conversion to business use plus improvements minus depreciation).

How to Calculate Stock Cost Basis

If you own stocks or other investments, you’ll use a similar method to calculate stock’s cost basis. In general, the stock’s basis will be what you paid for the shares.

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How to Calculate Capital Gains Tax

The first step in how to calculate long-term capital gains tax is generally to find the difference between what you paid for your property and how much you sold it for —adjusting for commissions or fees. Depending on your income level, your capital gain will be taxed federally at either 0%, 15% or 20%.