Real Estate Basis

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