Calculating My Basis

Your basis is essentially how much you got your property for. But calculating that number is a little more involved than it may seem at first glance. How you got the property determines how you figure your basis.

If you purchased your property, then your basis is equal to what it cost you to purchase it. That means the price you paid plus any other expenses you had to incur to buy the property. For example:

You purchase a plot of land for $100,000. You work with your lawyer to arrange the purchase, and incur $5,000 in legal expenses. What’s your basis in the property? Your total cost: $105,000.

If you received your property as a gift, calculating your basis can get a bit trickier. You need to know the fair market value of the land at the time of the gift, the adjusted basis the gift-giver had at the time of the gift, and the amount of any gift tax he or she paid. The property will have a basis regardless of whether the gift results in a gain or loss for the giver.

If the gift results in a gain for the giver, the basis will equal the giver’s adjusted basis plus any adjustments you make to the property while it’s in your

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possession.

Here’s a simple example:

Jack bought land in 2005 for $4,000/acre. In 2007, he gave the land to Chris when the fair market value of the land was $5,000/acre. This year, Chris sold his land for $5,500/acre. Chris’s basis in the land is $5,000, which means his taxable gain from the sale is $500/acre ($5,500 - $5,000).

If the gift results in a loss for the giver, the basis equals whichever is the lower number: the giver’s adjusted basis plus the gift tax paid, or the fair market value on the date of the gift.

For example:

Jack bought land in 2005 for $4,000/acre. In 2009, he gave land to Chris when the fair market value of the land was $3,000/acre. When Chris sells the land for $2,000/acre, his basis in the land is $3,000/acre, which results in a $1,000/acre gain on the sale ($3,000 - $2,000).

Gifts call for a complex set of tax rules, so it may be best to consult with an accountant or other tax professional if you receive your property that way and wish to calculate your basis.

If you inherited your property, you will receive what is known as a “stepped-up” basis. This just means you receive the property with the appreciation (the amount that property values increase over time) built in. The basis is equal to the fair market value (or possibly the special use value, for some forestry and agricultural land) at the time of the owner’s death.

For example:

Nannette passes away in 2014 leaving her woodlands to her son, Jack. She had purchased her property in 1965 for $200/acre. At the time of her death its fair market value was $2,000/acre. If Jack sells the land in 2015 for $2,100/acre, what are the tax consequences?

Because of the stepped-up basis rules, Jack has a basis in the property of $2,000/acre. The gain on his sale would be $100/acre ($2,100 - $2,000).

Without the rules allowing that step-up in basis, Jack’s gain on the sale would be $1,900/acre ($2,100 - $200) – and his tax liability would reflect that.

If you acquired your property through an exchange, calculating your basis can get quite complicated. Some exchanges are taxable and some aren’t, and the facts and circumstances of your exchange will determine what kind it is and how that affects your basis. You should consult with an accountant or other tax professional to figure out your basis in the property.

Whether you keep the property you’ve acquired for one year or many decades, it will change under your ownership—and those changes can, in turn, change your basis.