When an investor buys a commercial property, his or her “tax basis,” also referred to as “costs basis,” is generally the amount he or she paid to purchase the property. These acquisition costs include down payments, mortgage loans and most closing costs, such as title searches and legal fees, while excluding loan closing fees and property insurance. The investor’s basis in a property can rise or fall during the period of ownership due to such things as capital improvements, which increase basis, and depreciation deductions for the decline in a property’s value over its useful life, which decrease cost basis. In general,
It is critical that investors properly determine and regularly adjust their basis in real property because it determines whether or not a sale of the property will result in a taxable profit or deductible loss. In general, the lower the adjusted basis, the more capital gains tax investors will have to pay when they sell the property.
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