Definition of "Cost Basis"

David Rodstol real estate agent

Written by

David Rodstolelite badge icon

RE/MAX Aerospace Realty

If you’re an owner of a property that needs to be accounted for in your return on investment or used to calculate your capital gains and losses, then the cost basis will help you along. The cost basis definition is the original cost of an asset or property. As simple as that. The term is applied to assets that are considered an investment, and the concept itself is adjusted in the business world for dividends, stock splits, and return of capital distributions.

The cost basis’s basic function is to determine the profit or capital gain of an asset and know the difference between an asset’s original cost and the current market value. During taxation, an asset’s gain in value is the means of calculation. An asset bought can appreciate or depreciate, and from the cost basis, that difference is determined, and the tax is based on the end figure.

What does Cost Basis Mean?

Any investment’s cost basis is the original cost of purchase, plus any commissions or fees involved in the transaction or the asset’s value when it becomes someone’s possession. When determining the cost basis, how the asset came to be in the owner’s possession is important. Because of that, we have the following types of cost basis:

  • Assets purchased - the cost basis for purchased assets is the original cost of the asset;
  • Assets gifted or intrusted - the cost basis for gifted or intrusted assets is the same as the donor’s cost basis;
  • Assets inherited - the cost basis for inherited assets is also known as the stepped-up basis, as the asset is the asset’s value when the person who willed it died.

To exemplify the difference between the three and understand how to calculate cost basis, we have the following:

A purchased asset’s cost basis is the original price of the property you buy with $300,000. 

A gifted asset’s cost basis is the property’s original price when the owner who gifted it to you bought it for $280,000. Here you owe capital gains tax on the $20,000.

The inherited asset’s cost basis is the property’s original price when the person who willed it to you died. So if the person who died bought it with $100,000 but its assessed value is at $300,000, the $200,000 difference does not impose capital gains tax.

 

Need help as a:

I'm interested to:

Buy
Sell
Rent

I work in:

Residential
Commercial
Rental
Reach out to the local professionals for help
 
I agree to receive FREE real estate advice.

Agents, get listed in your area. Sign up Now!

Here's what you'll get:

1. Full zipcodes coverage for the city of your choice for 3 months

2. The ability to reach a wider audience

3. No annual contract and no hidden fees

4. Live customer support/No robo calls

$75 - Any City - 3 Months Coverage
 
loader gif

Please wait ...

I agree to receive FREE real estate advice
I agree with Terms & Conditions and Section 5-5.9.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

Fee payable because of late payment. For example, a mortgagor is assessed a $30 late charge by the bank for not paying the mortgage payment when due. ...

Generally, a tight market does not offer too much opportunity for negotiations.  More precisely, a tight market means a trading environment where the spreads between the asking and ...

In a broader sense, Full Disclosure means presenting all information (significant or not, classified or not) related to a certain matter. In Real Estate, the term “Full ...

Statement made by a person that is not in writing. An example is an oral representation made by a real estate broker to a prospective buyer of property. ...

The definition of net sales price in real estate is the combined total cost to the buyer of a listing, excluding any auxiliary costs such as the sales fee, appraisal fee, real estate agent ...

Intermediate debt (5 to 10 years) without periodic payments but the entire amount (balloon payment) is due at the maturity date. If full payment is not made, the lender may foreclose on the ...

The Loan-to-value ratio (LTV)  is a calculation that measures how much you need to pay for a mortgage (loan) concerning how much the asset is worth. The loan-to-value ratio in real ...

America remains a top tourist attraction worldwide, with over 79 million foreign visitors a year. Many are seduced by the American Dream and sooner or later they wonder how they could ...

Supports a structure. ...

Popular Real Estate Questions