Quick Cost Basis Check- possibly bad advice
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Accountant · Long Island, NY · Member since 2021 · 184 posts · 148 votes
2moQuote from @Amber T.:
Hello BP Community,
I may have been given suspect advice by an accountant and would appreciate a quick check from the community.
In reading through IRS 551, my understanding is that the cost basis is the actual sale price of the property, with tax assessor % only used to break out the land & building allocation.
An accountant told me the opposite and filed my cost basis as the tax assessor value, over $100,000 below the sale price. They told me that sale price can never be used for cost basis, only a 3rd party appraisal would justify a cost basis higher than the tax assessor value. I cannot find anything to support this in 551 or online.
Can anyone help to confirm or refute this advice?
Thank you in advance!
Hi @Amber T. - Your current accountant is incorrect. You are correct. This is a very elementary concept that really any CPA/Tax accountant should understand. I would look elsewhere for a professional who is well experienced in real estate taxation, especially if you are looking to buy more properties in the future/have an existing portfolio.
Regarding impact, a lowered cost basis will provide less depreciation throughout the hold, and more taxable gain when you sell. The IRS thinks your cost basis is lower than it actually is.
10 Replies
- Investor · Pflugerville, TX · Member since 2014 · 152 posts · 95 votes2mo
Generally the sales price IS the cost basis as that is what you actually paid for it. There are some exceptions such as doing a 1031 exchange where some cost basis can get rolled into your new property but if you are talking about a single property, the purchase price is the basis. You can split the value of the property vs. the land in the same percentages as the tax appraised so you have something to justify it. Think about it this way, if you were selling a stock, you pay gains tax on what you sold for minus what you paid for it. Not what someone else thinks it should have been worth when you bought it. Tax assessor value is not really used for anything except estimating the property taxes.
- Accountant · Long Island, NY · Member since 2021 · 184 posts · 148 votes2mo
Quote from @Amber T.:
Hello BP Community,
I may have been given suspect advice by an accountant and would appreciate a quick check from the community.
In reading through IRS 551, my understanding is that the cost basis is the actual sale price of the property, with tax assessor % only used to break out the land & building allocation.
An accountant told me the opposite and filed my cost basis as the tax assessor value, over $100,000 below the sale price. They told me that sale price can never be used for cost basis, only a 3rd party appraisal would justify a cost basis higher than the tax assessor value. I cannot find anything to support this in 551 or online.
Can anyone help to confirm or refute this advice?Thank you in advance!
Hi @Amber T. - Your current accountant is incorrect. You are correct. This is a very elementary concept that really any CPA/Tax accountant should understand. I would look elsewhere for a professional who is well experienced in real estate taxation, especially if you are looking to buy more properties in the future/have an existing portfolio.
Regarding impact, a lowered cost basis will provide less depreciation throughout the hold, and more taxable gain when you sell. The IRS thinks your cost basis is lower than it actually is.
- Accountant · Los Angeles · Member since 2026 · 2 posts · 2 votes2mo
Hi Amber -
Your CPA is incorrect. Your cost basis is generally your purchase price plus the cost of any added capital improvements you may have had on the property during your holding period. As another member mentioned, there are some exceptions such as when a 1031 exchange is utilized, in which case any pre-existing gain is deferred and rolled into your new basis.
- Accountant · We serve all 50 states · Member since 2015 · 90 posts · 51 votes2mo
Agree with my colleagues! The cost basis is the purchase price with additional legal costs, broken down by land/building value in proportion to the property tax assessment percentage.
Here is the link to Publication 527:
https://www.irs.gov/pub/irs-pdf/p527.pdf
on Page 10, it says:
"Cost Basis
The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services."Then later:
"Separating cost of land and buildings. If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. The part of the cost that you allocate to
each asset is the ratio of the FMV of that asset to the FMV of the whole property at the time you buy it. If you aren't certain of the FMVs of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes.Example. You buy a house and land for $200,000. The purchase contract doesn’t specify how much of the purchase price is for the house and how much is for the land. The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which
$136,000 was for the house and $24,000 was for the land. You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000)." - 2moAaron ZimmermanBusiness MemberAccountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votesThis is simply not accurate. I’d be looking to amend this return asap. There is also a possibility the return can be superseded if you filed an extension before. When you buy a building, its sales price plus closing costs plus any costs incurred such as inspections, sewer scope, misc other fees.
Brick House CPAs53 Reviews - 2moSean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
Quote from @Amber T.:
Hello BP Community,
I may have been given suspect advice by an accountant and would appreciate a quick check from the community.
In reading through IRS 551, my understanding is that the cost basis is the actual sale price of the property, with tax assessor % only used to break out the land & building allocation.
An accountant told me the opposite and filed my cost basis as the tax assessor value, over $100,000 below the sale price. They told me that sale price can never be used for cost basis, only a 3rd party appraisal would justify a cost basis higher than the tax assessor value. I cannot find anything to support this in 551 or online.
Can anyone help to confirm or refute this advice?Thank you in advance!
Glad this got straightened out for you, Amber. @Marina Draper pulling the actual Pub 527 language and @Aaron Zimmerman's amend suggestion are both spot on, that's a return worth fixing given how much of a gap $100,000 in basis creates over the life of the hold.
One thing worth adding since you're about to go through your closing statement line by line to fix this: not everything on that settlement sheet actually belongs in basis, and lumping all of it in there the way people often do can cost you just as much as understating basis did, just in a different way. Some of those line items are current year deductions, some are their own separate amortization schedule, and only some of them actually capitalize into basis. Worth going through your original settlement statement item by item with whoever ends up doing the amendment rather than just moving the whole closing cost total into basis, since there's likely a faster deduction or two sitting in there unused.
This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
- 2moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Your reading of Pub 551 is correct, and that advice as described doesn't hold up. Cost basis starts with what you actually paid for the property in an arm's length transaction, purchase price plus closing costs like legal fees, transfer taxes, and title work. The tax assessor's value only comes into play for splitting that total basis between land and building, since land isn't depreciable and you need a reasonable method to allocate the purchase price between the two, assessor ratios are one accepted method, an appraisal is another, but neither one caps or overrides the actual basis itself.
There are situations where sale price isn't automatically your basis, related party transactions, below market family sales, or 1031 exchanges carrying over old basis, but a straightforward market purchase doesn't fall into any of those categories. If that's genuinely what happened here, over $100,000 of understated basis means understated depreciation every year until it's fixed, which is a real dollar amount worth correcting, either through an amended return for the error year or Form 3115 if multiple years have gone by using the wrong basis.
Get a second opinion from another CPA before assuming this needs to stay as filed, this is a fixable, documented error if the facts are as you've described them.
Happy to connect!
INVESTOR FRIENDLY CPA®5240 Reviews - 2moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 907 votes
Your reading of the pub is right and the advice you got isn't. For a normal arm's-length purchase your cost basis is what you actually paid, meaning the purchase price plus closing costs and any capital improvements, not the county assessor's value. The assessor number only comes into play for splitting that basis between land and building since land isn't depreciable, and an appraisal works for that split too, but neither one caps your basis at the assessed value. Recording your basis more than $100k below what you paid means you'd be under-depreciating every year and showing a bigger gain when you sell, so it's worth correcting. Depending on how many years are involved that's either an amended return or a Form 3115. I'd get a second opinion from a CPA who does a lot of real estate before you leave it as filed, since the right fix depends on your specific facts, so talk it through with your own tax advisor.
Malabute & Company CPAs525 Reviews As previously noted, the initial basis is calculated using the total purchase price plus capitalizable acquisition costs. It’s important to remember that not all line items on the closing statement are capitalized—prepaid items like property taxes, hazard insurance, and loan interest are typically expensed immediately.
To split the total basis between depreciable improvements and non-depreciable land, property tax assessments or formal appraisals are standard. For larger or higher-value properties, a cost segregation study is an excellent strategy to accelerate early depreciation deductions.
You’ve received some fantastic insights here from knowledgeable professionals—definitely time to bring a new CPA onto your team!
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