Real Estate Tax Calc
Start with original basis
Your starting point is the original cost basis, which for a purchased property is the purchase price plus acquisition costs — closing costs paid by the buyer (title insurance, attorney fees, recording fees, transfer taxes). Costs you paid at closing are typically added to basis rather than deducted as expenses.
If you inherited the property, your basis is the fair market value on the date of death (the step-up). If you converted a personal home to a rental, your basis is the lower of your adjusted cost basis or the fair market value at the conversion date.
Add improvements, subtract depreciation
Add capital improvements: any expenditure that adds value, extends useful life, or adapts the property to a new use increases your basis. New HVAC systems, roof replacements, additions, and appliances are improvements; routine repairs are not.
Subtract depreciation: every year of depreciation you claim (or could have claimed) reduces your adjusted basis. This is why selling after many years of depreciation can generate a large taxable gain even if the property's market value barely changed — the basis has been steadily eroded by the annual deductions.
The formula: Adjusted Basis = Original Basis + Capital Improvements − Accumulated Depreciation (allowed or allowable)
A worked example
Purchased: $350,000. Closing costs added to basis: $5,500. Total original basis: $355,500. Land value (not depreciable): $60,000. Building basis: $295,500. Improvements over 10 years: $30,000 new roof + $12,000 HVAC = $42,000. Accumulated depreciation over 10 years: $295,500 ÷ 27.5 × 10 = $107,454. Adjusted basis = $355,500 + $42,000 − $107,454 = $290,046. Sell at $550,000, selling costs $30,000, amount realized $520,000. Taxable gain = $520,000 − $290,046 = $229,954.
Which acquisition costs go into basis — and which don't
Not everything you pay at closing lands in basis. The costs of acquiring the property are capitalized: title insurance, title search and abstract fees, recording fees, transfer and stamp taxes paid by the buyer, survey costs, legal fees connected to the purchase, and any owner's title policy. These become part of the depreciable building basis (after the land allocation) and are recovered slowly over 27.5 years.
By contrast, the costs of obtaining the loan are treated separately. Loan points and origination fees, appraisal fees required by the lender, credit-report fees, and mortgage recording taxes are not added to the property's basis — they are capitalized as loan costs and amortized over the term of the mortgage as an interest-type deduction. Prorated property taxes and prepaid mortgage interest you reimburse at closing are neither basis nor loan costs; they are deducted in the year paid. Getting these buckets right at purchase prevents both lost deductions and an overstated basis that the IRS can unwind at sale.
Basis adjustments while you own the property
Basis is not frozen at purchase — it moves in both directions during the hold. It goes up for capital improvements, for assessments by a local government for streets or sidewalks that increase the property's value, for the cost of restoring damaged property, and for legal fees to defend or perfect title. It goes down for depreciation, for casualty-loss deductions and insurance reimbursements you receive, for any Section 179 or bonus depreciation taken on components, for easement payments you receive, and for the residential energy credits or other tax credits that require a corresponding basis reduction.
A casualty is a common trap. If a storm damages the roof and your insurer pays $20,000, that reimbursement reduces basis; the $28,000 you then spend on a better roof increases it. Track each event in the year it happens — reconstructing a decade of adjustments from memory at sale is where basis claims fall apart under audit.
Basis when you convert a home to a rental
Converting a personal residence to a rental triggers a special lower-of-cost-or-market rule for depreciation. Your depreciable basis is the lesser of (a) your adjusted cost basis on the conversion date or (b) the property's fair market value on that date. This prevents you from depreciating a paper loss that accrued while the home was personal-use.
This creates a well-known dual-basis situation. For computing a gain on a later sale, you use your regular adjusted cost basis; for computing a loss, you use the lower fair-market-value basis (reduced by depreciation). It is entirely possible to sell a converted rental for less than you paid and still have no deductible tax loss, because the loss basis is measured from the lower conversion-date value. Get a dated appraisal or strong comparable-sales evidence at conversion so both figures are defensible.
Basis in inherited and gifted property
How you acquired the property changes the starting basis dramatically. Inherited property receives a stepped-up basis equal to fair market value on the decedent's date of death (or the alternate valuation date) under IRC Section 1014. This wipes out the prior owner's accumulated depreciation and built-in gain — heirs start fresh and depreciate the stepped-up building value over a new 27.5-year life.
Gifted property is the opposite: you generally take a carryover basis equal to the donor's adjusted basis, inheriting their low basis and their depreciation history. Gifts also carry a dual-basis rule of their own — if the fair market value at the date of the gift was below the donor's basis, your basis for figuring a loss is that lower value. Because a gift keeps the built-in gain and an inheritance erases it, the timing of a transfer between family members has large tax consequences.
How adjusted basis splits your gain at sale
Adjusted basis does more than size the gain — it determines the character of that gain, which is taxed at different rates. When you sell, the total gain is first reduced by any unrecaptured Section 1250 gain, an amount equal to the straight-line depreciation you took (limited to the total gain), taxed at a maximum federal rate of 25%. The remaining gain is long-term capital gain taxed at 0%, 15%, or 20%.
Using the worked example above: of the $229,954 gain, roughly $107,454 (the accumulated depreciation) is unrecaptured Section 1250 gain taxed up to 25%, and the remaining ~$122,500 is long-term capital gain. High earners may owe the additional 3.8% Net Investment Income Tax on top, and most states tax the entire gain as ordinary income. Understanding this split before you sell lets you plan timing, installment sales, or a 1031 exchange to manage the rate you pay.
Common basis mistakes that cost investors money
A handful of errors recur every year. The first is failing to allocate land — depreciating the entire purchase price inflates your deductions and, worse, overstates recapture at sale; only the building is depreciable. The second is losing improvement records, so real basis additions can't be proven and the gain is overstated. The third is treating a refinance or a HELOC as a basis event — it isn't; borrowing against a property never changes basis. The fourth is forgetting to reduce basis for casualty deductions and insurance proceeds, which leaves basis overstated until an examiner catches it.
Two more are subtle. Owners of converted homes often use their original cost as the depreciable basis instead of the required lower of cost or fair market value at conversion. And investors who took partial dispositions — writing off the remaining basis of an old roof when replacing it — sometimes forget to remove that retired component from basis, double-counting it. Because basis is the single number that drives both depreciation and gain, a mistake here quietly compounds for the entire hold. Reconcile your basis schedule annually rather than reconstructing it under audit pressure.
Frequently asked questions
What is adjusted basis on a rental property?
Adjusted basis equals your original purchase price (plus closing costs) plus capital improvements, minus all depreciation you claimed or could have claimed. It's the number subtracted from the amount realized to compute your taxable gain.
Do repairs increase my basis?
No. Routine repairs maintain the property but do not add to basis. Only capital improvements that add value, extend useful life, or adapt the property increase basis.
What if I forgot to take depreciation?
The IRS still reduces your basis for depreciation 'allowed or allowable,' even if you didn't claim it — and you still owe recapture. File Form 3115 to claim the catch-up deduction rather than losing it.
Does refinancing change my basis?
No. Taking out a new loan or pulling cash out in a refinance does not change your adjusted basis — basis reflects what you invested in the property, not how it is financed. New loan points, however, are amortized as a separate loan cost over the term of the new mortgage.
How do I split basis between land and building?
Only the building is depreciable, so you must allocate the total basis. A common method is to use the county assessor's ratio of land value to total assessed value and apply it to your purchase price; a qualified appraisal is stronger. Document whichever method you use, because the land/building split drives your annual depreciation.
Is my basis the same for figuring a gain and a loss?
Usually, but not for converted or gifted property. A home converted to a rental uses your regular cost basis to figure a gain and the lower conversion-date fair market value to figure a loss. Gifted property carries the donor's basis for a gain and, if lower, the date-of-gift value for a loss.
Do insurance payouts affect my basis?
Yes. A casualty-loss deduction and any insurance reimbursement you receive reduce your basis, while amounts you spend to restore the property increase it. Net the two carefully in the year of the event so your basis reflects the actual out-of-pocket investment.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.