Real Estate Basis …explained by a certified professional
Tax season is in full swing across the United States
and in Alaska. We decided to talk to Mark Schneiter, local CPA at Schneiter & Moad, to see
what important documents or ideas property owners should be aware of come tax
time. Mark felt property owners should be more aware of what “basis” means
and what impact it can have on property owners’ taxes. He was gracious enough to take some
time to explain more about basis to our readers. We hope you learn something
as you continue to read. If at the end of the article you would like more
information, please contact Mark directly, or feel free to contact us and we’ll
get you connected with Mark.
Real Estate “Basis”
What
is “Basis”?
The starting point for basis is the original
purchase price of the property. The
basis is increased by the cost of any capital improvements made to the property
and, if the property is being used for business (such as a rental property or
office in home), the basis is reduced by any depreciation deductions.
What
is the importance of Basis?
When property is sold, the gain or loss on the sale
equals the amount realized on the sale minus the sold property's basis. Basis is also used to compute depreciation
deductions for tax purposes.
How
to “document” Basis.
Start a permanent file for the property. The first documents in the file should be the
closing documents for the purchase of the property. Whenever an improvement is made to the
property, put a copy of the invoice or receipt for the capital expenditure in
this permanent file. If the property is
subject to depreciation deductions, put a copy of the depreciation schedule
from your tax documents for each year in the file. When the property is sold, computing and
documenting the basis will be a simple matter of adding these improvements to
the original cost, and subtracting depreciation, if any.
How
long do I need to keep the “Permanent File”?
The tax law says you only need to keep documentation
for 3 years from the due date of the tax return on which the documented items
are included. This means you must keep
documentation of basis for 3 years after the due date for the last year that
the property you are documenting appears on your tax return. For real estate, this could be many
years. For instance, let’s say you
purchased a house in 2012. If you live
in this house until 2020, at which time you sell the house, you will have to
keep the file containing basis documentation for 3 years after filing your tax
return for 2020. Since the return is due
on April 15, 2021, the documentation must be kept until at least April 15,
2024!
Mark E. Schneiter, CPA
Schneiter & Moad, CPAs, PC
Email: s.and.m@gci.net
Direct: (907)562-4242
Fax: (907)562-6225
