Cost Basis after Cash Purchase

5 Replies

Hi BP, 

I read "Every Landlord's Tax Deduction Guide" by NOLO, great book.  I have a question regarding the cost basis for a property. 

Purchased:  69K, mid year during the tax year. Market value was about 85K.

Tax Assessment: 172 K (The city is nuts!)  I contested this and the tax was temporarily lowered to 40K.  They raised again to 172K.

Repairs took place over two tax years, I will ignore second tax year for now:  Tax year 1-  30 K in capital improvements. 

Total cost out of pocket:  99K. No mortgage, I refinanced after completion (tax year 2)

What would you use as the cost basis? 

My account indicates "purchased price plus capital improvements."  However, the property was purchased at a discount.  Can I use fair market value and tax assessment instead of actual cost?   The difference over 27.5 years is not that much, but I don't necessary agree with them. 

Imagine if you get a property at a heavy discount, or even inherited? How is the cost basis establish, then? 

Now, imagine if you overpay for a property, will the IRS allow you to depreciate the much larger cost or will they claim that you have a cap according to the fair market value and tax assessment?

Thanks, 

Frank

It’s gonna be your original purchase price plus capital expenditures. I wondered the same thing after I fixed up a few houses and refinanced them.

Originally posted by @Michael Bertsch :

It’s gonna be your original purchase price plus capital expenditures. I wondered the same thing after I fixed up a few houses and refinanced them.

 Thanks for the answer.  I refinanced on year two, appraisal came at 135K.  I assume that would be my new cost basis, correct?  My account should know, but it doesn't hurt to ask BP.

Thanks a bunch, 

Frank

As long as you acquired the property in an arm's length transaction, your tax basis is what you actually paid for it. The fact that you got it at a bargain price or alternatively paid more than someone else might have paid for it is irrelevant.

Property received through gift or inheritance is subject to a totally different set of tax basis rules.

Originally posted by @Frank Sanchez :
Originally posted by @Michael Bertsch:

It’s gonna be your original purchase price plus capital expenditures. I wondered the same thing after I fixed up a few houses and refinanced them.

 Thanks for the answer.  I refinanced on year two, appraisal came at 135K.  I assume that would be my new cost basis, correct?  My account should know, but it doesn't hurt to ask BP.

Thanks a bunch, 

Frank

Refinancing does not alter your original tax basis.

Thanks a lot. I appreciate it! 

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