Brief Definition
Tax basis, is the value used to determine gain or loss for tax purposes when an asset is sold or disposed of. It is typically the original cost of the asset, adjusted for various factors such as improvements, depreciation, and other capital expenses.
Further Explanation
Tax basis, is the value used to determine gain or loss for tax purposes when an asset is sold or disposed of. It is typically the original cost of the asset, adjusted for various factors such as improvements, depreciation, and other capital expenses. Understanding the tax basis of an asset is crucial for calculating capital gains or losses, which affect the amount of tax owed.
Example:
Jane buys a piece of property for $200,000. Over the years, she makes $50,000 worth of improvements to the property, bringing her total investment to $250,000. This adjusted amount becomes her tax basis. If Jane later sells the property for $400,000, her capital gain would be the selling price ($400,000) minus her tax basis ($250,000), resulting in a gain of $150,000. This $150,000 gain is what she would report on her taxes.