What Is Adjusted Basis?
Your basis in a property starts as your cost basis — what you originally paid. But over time, various events require you to adjust that number up or down.
Upward Adjustments (Increase Basis)
- Capital improvements (a new roof, addition, or kitchen remodel)
- Assessments for local improvements (new sidewalks, sewers)
- Legal fees to defend title
Downward Adjustments (Decrease Basis)
- Depreciation deductions claimed on rental or business property
- Casualty loss deductions previously claimed
- Insurance reimbursements received
The lower your adjusted basis, the larger your taxable gain when you sell. This is why keeping records of all capital improvements is important for investment property owners.
For inherited property, the adjusted basis is stepped up to fair market value at the date of death — eliminating any pre-death gain. See the Stepped-Up Basis entry for more.
Disclaimer: This glossary entry is for general educational purposes only and does not constitute legal or tax advice. Laws change frequently and vary by individual circumstances. Consult a licensed California attorney or CPA for guidance on your specific situation.