What is The Cost Basis Adjustment of Property

The Cost Basis of Property can be adjusted during the sale. If you’ve purchased your home, your starting point for determining the property‚Äôs basis is what you paid for it. Your basis in property is not fixed. It changes over time to reflect the true amount of your investment.

This new basis is called the adjusted basis because it reflects adjustments from your starting basis. The basis can be adjusted by many things including depreciation, losses, and in our examples; real estate taxes.

The “Cost Basis Adjustment” of the examples below have been adjusted during the sale due to real estate taxes being paid by buyer or seller.

Tax Basis of your Property
Real Estate Taxes are usually divided so that you and the seller each pay taxes for that part of the property tax year that each owned the home. If you pay any part of the seller’s share of real estate taxes, and the seller did not reimburse you, you will need to add those taxes to the cost basis of your home. You cannot deduct them as taxes paid.

If the seller paid any of your share of the real estate taxes, you can deduct those taxes and do not need to adjust those taxes in your basis only if you reimbursed the seller. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.

Figuring the Tax Basis of your Home
Cost Basis Example 1: Geoff and Erika bought a home on September 30. The real estate tax in the area they live in is the calendar year, and the tax is due on September 15. The real estate taxes on their home were $1,100 for the year and had been paid by the seller on September 15. Geoff and Erika didn’t reimburse the seller for their share of the real estate taxes from September to December 31.

1. Real Estate Taxes for the property year $1,100.00
2. # of days Geoff and Erika owned the property92
3. Divide line 2 by 365 of days in a year (92 / 365).2521
4. Multiply line 1 by line 3 ($1,100 X .2521)$277.31

Geoff and Erika must reduce the basis of their home by $277.31, the amount the seller paid for them. Geoff and Erika can deduct their $277.31 share of real estate taxes on their return for the year they purchased their home.

Cost Basis Example 2:
Murray and Cindy purchased a home on April 4, 2014. The property tax in the area is the calendar year. The taxes for the previous year are assessed on January 5 and are due on April 29 and November 30. Under state law, the taxes become a lien on April 30. Murray and Cindy agree to pay all the taxes due after the date of the sale. The taxes due in 2015 for 2014 were $1,600. The taxes in 2015 for 2014 will be $1675.

Murray and Cindy cannot deduct any of the real estate taxes paid in 2014 because they relate to the 2012 property tax year and they did not own the home until 2014. They will add the $1,600 to the cost basis of their home.

For 2014:

1. Real Estate Taxes for the property year $1,675.00
2. # of days Murray and Cindy owned the property 272
3. Divide line 2 by 365 days in the year (272 / 365).7452
4. Multiply line 1 by line 3 ($1,675.00 X .7452)$1,248.21

Murray and Cindy can take a deduction of $1248.21 on their tax return in the year they paid the real estate tax amount. They would also add $426.79 ($1,675 – $1,248.21) to the cost basis of their home the same year.