Tax Basis in Real Estate refers to the value of a property for tax purposes, which is used to determine gain or loss when the property is sold. It typically includes the purchase price plus any additional costs associated with acquiring the property, such as closing costs and real estate commissions, as well as improvements made to the property over time.
The tax basis can be adjusted for certain events, such as depreciation taken during ownership, which reduces the basis and thus increases taxable gain upon sale. For example, if a property was purchased for $200,000, and $50,000 was spent on improvements, the initial tax basis would be $250,000. If the owner later claimed $30,000 in depreciation, the adjusted tax basis would be $220,000.
Understanding the tax basis is crucial for real estate investors and owners, as it directly impacts tax liabilities when selling the property.
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