Topic 01 · 6 min read
What Cost Basis Is
The number every other real estate tax rule is built on.
Basis is what a property counts as costing you for tax purposes. It starts with the purchase price, plus the buying costs you were not allowed to deduct, and it changes over the years you own the place. Nearly every calculation that follows — depreciation, gain at sale, how much of a loss you may claim — starts from this one number.
What to know
- Price is only the start
- Title fees, recording charges, transfer taxes, legal work, and survey costs generally join the purchase price in basis rather than being deducted.
- Borrowed money still counts
- Basis reflects the full price, not your down payment. Buying a $400,000 building with $80,000 down still gives you a $400,000 starting basis.
- Some costs go the other way
- Loan fees, points, and prepaid interest belong to the loan, not the building, and are handled on their own schedule.
- Keep the closing statement forever
- The document that proves basis is the one people throw away. Reconstructing it twenty years later is painful and sometimes impossible.
The tax benefit
A carefully built basis produces larger depreciation deductions every year and a smaller taxable gain when the property is finally sold.
Worked example
Building the number
A $400,000 purchase with $6,000 of title, legal, and recording costs gives a starting basis of $406,000. The $3,500 of loan origination fees stay out and are written off across the loan term instead.
Watch out for
- Property tax and insurance paid at closing are ordinary expenses, not basis.
- Seller credits generally reduce what you are treated as having paid.
- Basis follows the property, so partial interests and joint purchases need their own records.
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