It’s my annual Taxes from A to Z series! This time, it’s Tax Cuts and Jobs Act style.
If you’re wondering whether you can claim house office expenses or whether to deduct a capital loss under the new law, you won’t want to miss a single letter.Basis is, at its most simple, the cost that you pay for assets. The actual cost is sometimes referred to as unadjusted basis because you can make adjustments to basis over time.
If you make a capital improvement to your house, that increases your basis. The result is sometimes called the adjusted basis .Building on our example, if your capital improvement costs $15,000, then your basis is $165,000, or $150,000 + $15,000. To figure out a gain or a loss for income tax purposes, you take the price of the asset at disposition and subtract the adjusted basis. That difference is your realized gain or loss; you’ll pay capital gains using that amount. So in my house example, if I sold the house for $200,000, the taxable gain would be $35,000, or $200,000 - $165,000.
Continuing our example, if the house was worth $200,000 on the date of death, the new basis would be $200,000; the purchase price and the adjustments are no longer relevant. When the estate or heir subsequently sells the property, the gain is the selling price less the stepped-up basis of $200,000. Assuming that the sale happens close to the date of death, there is generally no gain – or there's minimal gain – for income tax purposes.
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