Let's use an example to illustrate. When you're looking at the simplest scenario, basis is just how much the owner invested in that asset. Let's take real estate. You buy a house. The starting basis of that asset is how much you paid for the house. However, you can also increase the basis of an asset. You invest in a number of different improvements for your house-you remodel the kitchen, landscape the yard, put on a new roof, and so on and so forth. Then the basis will increase. However, basis can also decrease. If your house burns down, then the value of your asset obviously decreases, and so does the basis of that asset.

Basis can also change depending on how an asset is acquired and the nature of the asset's disposition. Let's look at another example to demonstrate. You decide that for an inheritance, you will give one of your children some appreciated stock. Rather than the basis remaining the same as it was when you purchased the stock, which is what would happen if you just randomly gave the stock to your child, the basis in this case is actually adjusted to the fair market value at the time of your death. This change in basis is called a step-up in basis.

You need to know what the basis of an asset for when you are trying to figure out how much depreciation to figure out per year. This kind of basis is known as the tax basis of an asset.

The way to determine the tax basis of an asset is to take the purchase price of the asset, subtract any discounts, add any installation fees, delivery charges, sales tax, and so on.

If you are trying to calculate the tax basis of a piece of real estate, along with the purchase price of the asset, you can include a number of other fees. Some of these fees are the title abstracts, title insurance, any surveys that are made of the real estate, legal fees, accounting fees, revenue stamps, recording fees, and any real estate taxes that have to be paid.

If you don't purchase the property, but it is rather given to you as a gift, then the tax basis will be equal to the tax basis that was assigned to the owner at the time the gift was made.

What happens if you want to convert any personal property that you own to business property? Then you calculate the following two amounts:

1. the fair market value of the property when the conversion is made


2. the cost of the property, plus any improvements, and minus any losses, up to the time of the conversion.

Of course, things are never as simple as they initially seem. There are a number of different exceptions to the rules stated above, and a number of different adjustments that you are going to have to make when calculating the tax basis of an asset.

1. Some assets are partially depreciable. This means that if you buy a whole bunch of assets at the same time, a portion of your acquisition costs might not be depreciable. Acquisition costs also might be depreciable at different rates. The same is true for any asset that is partially used for personal use and partially for business use.
2. If you trade-in an asset, trading one for another, then the tax basis of your new asset will be linked to the adjusted tax basis of your old asset.
3. You will probably have to make adjustments over time to the tax basis of your asset, based on the depreciation that you claim, any improvements made, and any casualty losses.