Definition:
The adjusted basis of an asset is the cost of the asset, adjusted for certain tax-related events such as depreciation, amortization, and capital improvements. It’s the value used to calculate gain or loss when the asset is sold or disposed of.
Key points about adjusted basis:
- Cost basis: The initial cost of the asset is the starting point for determining the adjusted basis.
- Adjustments: Adjustments can include:
- Depreciation or amortization: Reducing the basis over the asset’s useful life.
- Capital improvements: Increasing the basis by the cost of improvements that extend the asset’s life or increase its value.
- Casualty losses: Reducing the basis by the amount of a casualty loss.
- Gifts: The adjusted basis of a gifted asset is generally the same as the donor’s adjusted basis.
- Inheritances: The adjusted basis of an inherited asset is generally the fair market value at the time of the decedent’s death.
- Gain or loss: When an asset is sold or disposed of, the difference between the adjusted basis and the selling price determines the gain or loss.
Why is adjusted basis important?
- Tax implications: The adjusted basis is used to calculate capital gains or losses for tax purposes.
- Financial statements: The adjusted basis is reported on the balance sheet as the asset’s value.
- Decision-making: Understanding the adjusted basis is important for making decisions about asset sales or replacements.
In essence, the adjusted basis of an asset is the value used to determine the tax consequences of its sale or disposal.
