# Basis Definition and Legal Meaning

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

## What is Basis?

(n) Basis is used to denote the costing of a property while arriving at the profit earned to calculate the capital gain tax when that property is sold. There are two basis used to derive the cost of property sold. One is adjusted basis which is calculated as cost of acquisition plus cost of improvements. Stepped up basis is used on the property inherited after death of the owner where current vale at the time of death is taken as the cost.

## History and Meaning of Basis

Basis is a legal term used to describe the costing of a property when calculating capital gain tax. It is the value on which a taxpayer calculates and pays taxes after selling property. The basis of a property is computed by adding capital expenses like the cost of purchasing the property and the cost of any improvements made to it. There are two types of basis calculation: adjusted basis and stepped-up basis. Adjusted basis involves calculating the cost of acquisition and improvements, while stepped-up basis is used for inherited properties, where the current value at the time of inheritance is taken as the cost.

## Examples of Basis

1. John purchased a property for \$300,000 and spent \$50,000 on renovations. The adjusted basis for the property is \$350,000.
2. When Maria’s mother passed away, she inherited her mother's house with a stepped-up basis of \$500,000, which was the property's value at the time of her mother’s death.
3. After selling her house, Sarah calculated her taxable gain by deducting the property's basis from the sales price.
4. The IRS allows deductions on property taxes based on the adjusted basis of the property.
5. When filing taxes, it is essential to keep detailed records of the property's basis.

## Legal Terms Similar to Basis

1. Capital gains tax – It's the tax that is imposed on the profits earned from the sale of assets like property or stocks.
2. Cost of acquisition – It is the total cost incurred by a taxpayer in buying a property or an asset, including all associated costs like legal fees and closing costs.
3. Stepped-up basis – It's a method of calculating the basis of an inherited property by using the market value of the asset at the time of the original owner's death.