Adjusted Basis Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Adjusted Basis, written in plain English, along with examples of how it is used.

What is Adjusted Basis?

n. during the ownership, an asset loses or gains values because of costs of improvements, damage, devaluation, etc. The original cost is therefore, adjusted for all these losses or gains while calculating the worth, and is an adjusted basis. It is used in assessing the worth of a property for such purposes as auctioning, calculation of tax and rebates, etc.

History and Meaning of Adjusted Basis

Adjusted basis is a term used in tax law to refer to the original cost or value of a capital asset, adjusted for any improvements, depreciation, or other changes in value. The adjusted basis is used to determine the gain or loss when the asset is sold and to calculate annual depreciation deductions.

The concept of adjusted basis has been used in U.S. tax law since the early 20th century as a means of calculating the taxable gain or loss on the sale of an asset that has undergone changes in value over time. The calculation of adjusted basis can be complex, depending on a variety of factors such as the method of depreciation used, capital gains taxes, and the amount of improvements made to the asset.

Examples of Adjusted Basis

  1. John purchased a home for $300,000 and later made $50,000 in improvements. His adjusted basis for tax purposes would be $350,000.

  2. Sarah inherited a piece of property from her grandmother with an adjusted basis of $200,000. When she later sold the property for $400,000, she was taxed on the capital gain of $200,000 ($400,000 selling price minus the $200,000 adjusted basis).

  3. Michael purchased a commercial building for $2 million and later sold it for $3 million. However, he had made $500,000 in depreciation deductions over the years, which meant his adjusted basis was $1.5 million. This resulted in a capital gain of $1.5 million ($3 million selling price minus the $1.5 million adjusted basis).

Legal Terms Similar to Adjusted Basis

  1. Basis - The original cost of an asset, used to determine the gain or loss when it is sold.

  2. Capital Gains - The profit made from the sale of a capital asset, such as property or stocks.

  3. Depreciation - The gradual decrease in the value of an asset over time, used to calculate annual deductions for tax purposes.