The cost basis of a property is a critical factor in determining taxable gain or loss when the property is sold or disposed of.It represents the original purchase price of the property,adjusted for certain expenses and improvements.Understanding what can be included in the cost basis of a property is essential for property owners,as it can impact their tax liability.We will explore the various elements that can be included in the cost basis of a property.
The purchase price is the most fundamental component of the cost basis.It includes the amount paid to acquire the property,including the negotiated price,down payment,and any assumed mortgage or debt.
Certain closing costs associated with the purchase of the property can be included in the cost basis.These may include expenses such as title insurance fees,attorney fees,lender fees,appraisal fees,and recording fees.However,it's important to note that not all closing costs can be included,so it's advisable to consult with a tax professional or refer to IRS guidelines for specific eligibility.
Legal Fees and Transfer Taxes:
Legal fees paid for services related to the acquisition of the property,such as attorney fees for title search and document preparation,can be included in the cost basis.Additionally,any transfer taxes or stamp duties paid to transfer the property's ownership rights can also be added.
Settlement or Closing Costs:
Settlement or closing costs associated with the purchase,such as prepaid property taxes and prepaid interest,may be included in the cost basis.These costs are typically prorated between the buyer and seller and can be claimed by the buyer as part of the cost basis.
Capital improvements made to the property can be included in the cost basis.Capital improvements are substantial enhancements that extend the property's useful life,increase its value,or adapt it to a different use.Examples of capital improvements include room additions,significant renovations,landscaping,a new roof,or the installation of central heating and air conditioning systems.It's important to keep detailed records and receipts of all capital improvements made to the property.
Special assessments levied by a local government or homeowners association for improvements benefiting the entire community,such as road repairs or utility installations,can be added to the cost basis of the property.
Assessments for Local Improvements:
Assessments for local improvements,such as sidewalks,street lighting,or sewer lines,can be included in the cost basis if they increase the value of the property.However,routine repairs and maintenance expenses are not considered part of the cost basis.
If the property is used for business or rental purposes,depreciation can be factored into the cost basis.Depreciation allows property owners to deduct the cost of wear,tear,and obsolescence over the property's useful life.However,it's important to note that depreciation may have tax implications when the property is sold,as recaptured depreciation is subject to taxation.
Property taxes paid on the property can generally not be included in the cost basis.They are considered deductible expenses,but not part of the property's original cost.However,they may be factored into the calculation of gain or loss when the property is sold.
Repair and Maintenance Expenses:
Routine repair and maintenance expenses,such as fixing a leaky faucet or repainting,cannot be included in the cost basis.These expenses are considered part of the ongoing maintenance of the property and do not add to its value or extend its useful life.