Adjusted Cost Base
Definition and meaning of Adjusted Cost Base in real estate.
Adjusted cost base is the total acquisition cost of a property, including the purchase price and associated buying fees, plus the cost of any permanent capital improvements. It is used by tax authorities to determine capital gains or losses when the property is sold.
In more detail
To calculate the adjusted cost base, owners add expenses like legal fees, transfer taxes, and title insurance to the original purchase price. They also add the cost of major renovations, such as adding a new roof or building an addition, while excluding routine maintenance costs like painting or minor repairs.
A higher adjusted cost base is beneficial because it reduces the taxable capital gain when the property is sold. Real estate investors must keep meticulous records and receipts of all capital improvements to substantiate these calculations. Rules governing taxes can be complex, and specific regulations vary depending on ownership status.
Key facts
| Category | Real Estate Investing |
|---|---|
| Also known as | Adjusted cost basis |
| Includes | Purchase price, transaction fees, and capital improvements |
| Excludes | Routine maintenance and repair costs |
An investor purchases a duplex and pays typical closing costs plus the expense of a new HVAC system, all of which are added to the purchase price to calculate the adjusted cost base.
Frequently asked questions
How does the adjusted cost base affect my taxes?
When you sell a property, your taxable capital gain is calculated by subtracting your adjusted cost base from the final sale price.
Can I include the cost of a new roof in the adjusted cost base?
Yes, a new roof is considered a capital improvement because it adds value and prolongs the life of the property, unlike simple repairs.