Basis?

[Bilgefisher]

This is a concept I feel I only have a minor grasp on. My thick skull is having trouble nailing it down. What exactly is basis when dealing with property?

Here's what I can come up with. Basis is the value of a property minus what you paid for it.

Ex.
1. 150k Mortgage current value 200k. Basis 50k?

2. Ok now suppose you put 20k down and the mortgage is still 150k. FMV 200k. Basis would be 30k?

3. Now I read of other factors, improvements and depreciation.
150k Mortgage.
0 down.
FMV 200k.
20k improvements
~11k depreciation (assume 2 years ((150k/27.5)*2))

200k-150k-20k+ 11k= $41000 Basis?



Am I on target here or way off?:huh2:

 

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[kurtyordy]

mortgage has nothing to do with basis. I have a property that I paid 83k for and have 130k in mortgages on it.

Basis is what you paid. You pay 150k, your basis is 150k regardless of what current value is.

You also have to figure in depreciation which will lower your basis.

Profit is Sale price- basis. So if you depreciate you 150k basis down to 100k, and you sell for 200k, your profit is 100k, not 50k.

However, 50k is cap gains, and 50k is deprecatiation recapture which used to be at a different rate, not sure if it still is.

 

[AroundTheWorld]

basis, in a nutshell is what you pay for the property + cost of capital improvements.

 

[kidgas]

For real estate, the "basis" that you would look at for tax purposes is the purchase price of the property plus any improvements. For example, if you purchase a property for 150K, then 150K is the basis. It doesn't matter how much you put down. If you sell for 200K, the basis is 150K and your gain is 50K. Any improvements or major repairs just adds to the basis and ultimately lowers your gain upon sale.

 

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[Bilgefisher]

Samsonite! I was way off.


Glad I asked.
Ok let me try again. It sounds like I'm mixing two ideas. Basis and profit.

Down payment and capital improvements increase my basis, while depreciation decreases it?

Assume 20k down, 10k improvements. And 15k depreciation. Basis would be 15k?

 

[kurtyordy]

Samsonite! I was way off.


Glad I asked.
Ok let me try again. It sounds like I'm mixing two ideas. Basis and profit.

Down payment and capital improvements increase my basis, while depreciation decreases it?

Assume 20k down, 10k improvements. And 15k depreciation. Basis would be 15k?

no, paid 100k for proprerty, 20k down , 10k improvements, 15k depreciation, your basis would be 95k

what you put down is irrelevant, it is what you paid for the property.

 

[Bilgefisher]

For real estate, the "basis" that you would look at for tax purposes is the purchase price of the property plus any improvements. For example, if you purchase a property for 150K, then 150K is the basis. It doesn't matter how much you put down. If you sell for 200K, the basis is 150K and your gain is 50K. Any improvements or major repairs just adds to the basis and ultimately lowers your gain upon sale.

So if you bought a property for 150k with 30k down and 120k mortgage. Still wouldn't matter, basis is 150K?

 

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[kurtyordy]

So if you bought a property for 150k with 30k down and 120k mortgage. STill wouldn't matter, basis is 150K?

yes, without considering depreciation and improvements.

 

[Bilgefisher]

yes, without considering depreciation and improvements.

ATW, Kurt and Kidgas, Thank you. I knew I was making it harder then it needed to be.

 

[kurtyordy]

Not to confuse you more, but there is another consideration if the property is in an entity. MY accountant explained it to me, and this is how I understand it. I may not be 100%, but here goes. You put 30k into llc, llc buys prop for 150k. Your basis is 30k, your llc basis is 150k. So if your llc throws off losses, your max you can claim is 30k

 

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[Bilgefisher]

But if your not under the real estate professional status, wouldn't you be able to claim up to an additional 25k? And infinite if real estate professional?