Adjusted Basis: A Comprehensive Guide to Its Legal Definition
Definition & Meaning
Adjusted basis refers to the value of an asset or security after accounting for various factors that may affect its worth. This includes any improvements made to the asset, depreciation taken over time, and any damages that may have reduced its original value. The adjusted basis is essential for calculating the gain or loss when selling the asset or security. Typically, the adjusted basis is higher than the original purchase price, which can help lower capital gains taxes when the asset is sold.
Legal Use & context
Adjusted basis is primarily used in tax law and property law. It plays a crucial role in determining the tax implications of selling assets, such as real estate or stocks. Understanding adjusted basis is important for individuals and businesses as it can significantly impact tax liability. Users can utilize legal forms and templates from US Legal Forms to manage transactions involving assets and ensure accurate reporting of gains or losses.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A person buys a house for $200,000. Over the years, they make $50,000 in improvements. If they also claim $20,000 in depreciation, their adjusted basis would be $230,000 ($200,000 + $50,000 - $20,000). When they sell the house, this adjusted basis will be used to calculate their capital gains.
Example 2: An investor purchases stock for $10,000. If they invest an additional $2,000 in improvements to the investment strategy and later sell the stock for $15,000, their adjusted basis of $12,000 will help determine their taxable gain. (hypothetical example)