What is my Tax Basis?
The tax basis (or "cost basis") of your home is the amount the IRS thinks that your home is worth. It is not related to the actual market value.
Your tax basis is used to calculate capital gains. For example, if you sell a home for $120,000, and your tax basis is $101,000, then you have a $19,000 capital gain.
Your tax basis is determined by taking the original purchase price, adding in the capital improvements that you have made to the property, and subtracting depreciation deductions.
Capital improvements are improvements that you make to the property that last a long time. For example, putting a new roof on your house is a capital improvement.
Property expenses on investment property can be deducted on your taxes right away. But capital improvements cannot be fully deducted on your taxes in the year of the expense, rather, they are "capitalized", or deducted over the life of the improvement. (Short term expenses, such as paying someone to mow the lawn, can be "expensed", or deducted fully on your taxes in the same year as the expense was paid, so they do not increase your tax basis.)
Depreciation is a tax deduction that you can take each year based on the assumption that as a property ages, it goes down in value, or "depreciates". This assumption is valid for a computer, but generally not valid for a home. (Homes generally go UP in value even though they are getting older.) That is why depreciation is referred to as a "paper loss", because it is a loss "on paper", but not an actual loss of value to the property.
The IRS determines the life span of a residential home to be 27.5 years, so each year you can deduct 1/27.5th of the property value, not including the land value. For example, if you bought a property for $100,000 and determined that the land was worth $15,000, then you could deduct approximately $3,090 each year for the next 27.5 years. (To get that value, I took $100,000 - $15,000 = $85,000 which represents the value of the building, or "improvement", then divided $85,000 by 27.5 to get $3,090.) (NOTE: Even if you don't deduct the depreciation amount on your taxes, your tax basis is still reduced by that amount!)
The amount of depreciation that you can take in the year of the purchase is determined by the month of the purchase. For example if you bought in the middle of the year, you would get about half of the yearly depreciation amount. The IRS provides tables to determine the depreciation amounts in the year of the purchase (acquisition) and in the year of the sale (disposition).
Simplified Example:
Your tax basis is used to calculate capital gains. For example, if you sell a home for $120,000, and your tax basis is $101,000, then you have a $19,000 capital gain.
Your tax basis is determined by taking the original purchase price, adding in the capital improvements that you have made to the property, and subtracting depreciation deductions.
Capital improvements are improvements that you make to the property that last a long time. For example, putting a new roof on your house is a capital improvement.
Property expenses on investment property can be deducted on your taxes right away. But capital improvements cannot be fully deducted on your taxes in the year of the expense, rather, they are "capitalized", or deducted over the life of the improvement. (Short term expenses, such as paying someone to mow the lawn, can be "expensed", or deducted fully on your taxes in the same year as the expense was paid, so they do not increase your tax basis.)
Depreciation is a tax deduction that you can take each year based on the assumption that as a property ages, it goes down in value, or "depreciates". This assumption is valid for a computer, but generally not valid for a home. (Homes generally go UP in value even though they are getting older.) That is why depreciation is referred to as a "paper loss", because it is a loss "on paper", but not an actual loss of value to the property.
The IRS determines the life span of a residential home to be 27.5 years, so each year you can deduct 1/27.5th of the property value, not including the land value. For example, if you bought a property for $100,000 and determined that the land was worth $15,000, then you could deduct approximately $3,090 each year for the next 27.5 years. (To get that value, I took $100,000 - $15,000 = $85,000 which represents the value of the building, or "improvement", then divided $85,000 by 27.5 to get $3,090.) (NOTE: Even if you don't deduct the depreciation amount on your taxes, your tax basis is still reduced by that amount!)
The amount of depreciation that you can take in the year of the purchase is determined by the month of the purchase. For example if you bought in the middle of the year, you would get about half of the yearly depreciation amount. The IRS provides tables to determine the depreciation amounts in the year of the purchase (acquisition) and in the year of the sale (disposition).
Simplified Example:
- You bought a property for $100,000.
Tax basis at that time: $100,000 - You put a new roof on the house for $10,000.
Tax basis at that time: $100,000 + $10,000 = $110,000 - You deducted $3,000 per year in depreciation for 3 years, for a total of $9,000 in depreciation deductions.
Tax basis at that time: $110,000 - $9,000 = $101,000 - You sold the property for $120,000. You had a capital gain of $19,000. Since you held the property longer than 1 year, you would pay capital gains tax at long term capital gains rates, which is currently 15%, (although it could go up at any time), so your tax bill would be $19,000 x 15% = $2,850.
Posted at
4:17 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home