Tuesday, October 10, 2006

Calculate Cost Basis

How to calculate cost basis can be a confusing concept to those who contemplate selling their real estate. Along with fair market value and holding period, cost basis represents one the three key components in identifying the amount of potential tax that may be due on the sale of the property.

Unfortunately, how to calculate cost basis is not a common concept ingrained in us through our normal day-to-day educational experience. However, it very quickly becomes very real as we explore various real estate exit and transition strategies.

A good place to start in developing an understanding how to calculate cost basis is by defining capital gain. What are capital gains and how do they apply to real estate? In simplest terms, a capital gain is the appreciation between the original cost and current sale price. The federal government and most state governments tax this "gain" if the asset is sold.

The sales proceeds less any associated selling costs represent the "value" of the property being sold. It does not matter if the property is encumbered by debt or not in this calculation. And, it does not matter if all proceeds are received at the time of sale or not. The net result is still the value of the property at the time of sale - the top number in our simple mathematical equation to determine the amount of "gain" in the property.

In contrast, cost basis is the bottom number that is subtracted from value to give us the answer to our gain question. Simply stated, cost basis is the original cost of the property, plus any improvements made by the owner. Improvements can be items such as:

* Installing utilities on a building lot (electrical pole, well, septic system, etc)
* New roof or deck
* Remodeling the interior of the home
* Numerous other improvements performed by the owner

When selling property, it is imperative to define the cost basis of the investment. Accurately define any improvements made on the property and compare it to the current value. The difference is the capital gain and subsequent amount that could be taxed by the government during the sale. By having developed an accurate cost basis, you will be better prepared to take advantage of the various capital gain tax planning options.

0 comments:

Cnc Cnc Machines | Cnc Retrofit | cnc plasama cutting | Cnc Metal | Auto Needs | Used Machinery | Free Cnc Software | Stock Exchange | Seo Lates Updates | How To Improve Adsense | Free Tennis Players | Medical Billing | Increas Sales | Top Security | Data Recovery | Home And Family | Debt Consolidation | Personal Finance | Currency Trading News | Home Appliance Store | Insurence Guide | Preferred Stock Mutual Funds | Realestate Investing | Personal Finance | Currency Trading | Leases Leasing | Online Advertising Jobs | Business Industry | Sales Management | Careers Employment | Small Business Loans | Credit Card Menu | Online Tax Services | Industrial Mechanical | Power Generators | Solar Industry | Indian Property | Aluminum Products | Computer Guide | Business Internet | Metal Directory | Network to PC | Beauty Tips | Industry INFO | Cnc Machinery | Car On Net | Gold Digger World | Cnc One Net | Cad Cam | Conveyors | Business Industry | Hydralic Machines | Heat Exchangers | cnc repair | Zinc | Steel | Internet Business | Finance Information | Home Loans,Car Loans | Loans Free | Finance Bank | Cheap Internet Webhosting | Self Improvement | Building

Followers