Income Tax Basis

“Basis” is a concept that is important in determining the tax you owe when you have a profit or a loss on a transaction. Your “cost basis” in an asset is the amount you paid for it plus any relevant costs and fees. For example, if you bought a home for $200,000 and there were settlement and other fees at closing that came to $1,000, your cost basis would be $201,000. If you inherit or receive an asset as a gift, your basis is the fair market value of that asset.

Your basis may be reduced by factors like depreciation and it may increase due to improvements you’ve made to the asset, among other factors.

When you sell an asset, your basis is used to determine your capital gain on the sale, which could be taxable. For example, say your basis in your home is $200,000, then you sell it for $440,000. Your capital gain is $240,000, or the amount of your profit on your house ($450,000 minus $200,000). Under the tax laws (as of 12/15/2017), you can exclude up to $250,000 of your capital gain from your income. Since your taxable capital gain is less than $250,000, you will not have to pay any capital gains tax on this sale.

The income tax basis is also important when you receive a gift. Generally, your basis in an asset you receive as a gift is the same as it was for the person who gave it to you. If you inherit an asset, your basis is generally the fair market value of the property. If you sell the property, your basis will determine whether you have a capital gain or loss to report on your tax return.

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