{"id":6383,"date":"2023-08-30T18:40:43","date_gmt":"2023-08-30T18:40:43","guid":{"rendered":"https:\/\/griffinfunding.com\/?p=6383"},"modified":"2026-03-22T00:41:18","modified_gmt":"2026-03-22T00:41:18","slug":"adjusted-basis-of-a-rental-property","status":"publish","type":"post","link":"https:\/\/griffinfunding.com\/blog\/mortgage\/adjusted-basis-of-a-rental-property\/","title":{"rendered":"What Is the Adjusted Basis of a Rental Property?"},"content":{"rendered":"

The adjusted basis in real estate is one of the most important metrics for calculating your tax burden. It\u2019s primarily used to calculate capital gains and losses during tax season to determine how much you\u2019ll owe for that year. However, it can also be used to calculate\u00a0depreciation deductions<\/a>\u00a0you can claim on your taxes to reduce your taxable income and calculate your total rental income to\u00a0determine your return on investment<\/a>\u00a0(ROI).<\/p>\n

But what is the adjusted basis of a rental property, and how can you calculate this key financial metric to gauge profitability? Keep reading to learn more about adjusted basis for rental property and how you can use it to increase your returns.<\/p>\n

What Is Adjusted Basis<\/b>?<\/b><\/h2>\n

Adjusted basis is a property\u2019s tax-relevant cost after accounting for capital improvements and subtracting depreciation or losses. This is a financial calculation used to calculate how much you\u2019ll owe in taxes based on your capital gains or losses.<\/span> It can also help you measure the ROI of an investment property.<\/span><\/p>\n

To understand the adjusted basis, you must first <\/span>understand the basis<\/span><\/a>:\u00a0<\/span><\/p>\n

Basis definition<\/b>: In real estate, the basis refers to the cost of the investment property, including the purchase price and associated fees. This is also known as the cost basis, which calculates capital gains or losses for tax purposes when you sell a property.<\/span><\/p>\n

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A high adjusted basis means lower gains, and whether you take out investment property loans<\/a> doesn’t matter since it’s not factored into this question. Instead, the basis only refers to the purchase price of the property and realtor fees.<\/p>\n

The adjusted basis is when the basis \u2013 the purchase price of a property \u2014 is adjusted based on expenses associated with the property. For instance, rental properties require regular maintenance and insurance, while depreciation brings the value of the property down.<\/p>\n

Adjusting the basis allows you to determine how profitable an investment property is once it’s sold. It won’t help you determine the profitability of a long or short-term rental<\/a> while you still own it and collect rental income.<\/p>\n

The adjusted basis doesn\u2019t factor in rental income or expenses associated with being a landlord. Instead, it only comes into play when the property is sold because\u00a0the IRS treats rental income as regular income<\/a>, not capital gains or losses associated with investments.<\/p>\n

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How Does Adjusted Basis Work?<\/h2>\n

Let’s review: The adjusted basis of a rental property is the total cost of the property based on increases or decreases in value. When you sell an investment property, you’ll use the adjusted basis to calculate your returns by factoring in your expenses, which can result in capital gains or losses.<\/p>\n

The adjusted basis starts with the original purchase price of the property \u2014 how much you paid for it whether or not you used an investment property loan, DSCR loan<\/a>, or any other type of mortgage. Again, this original number is called the basis.<\/p>\n

Two things can happen to your basis over time: your adjusted basis can increase or decrease when you choose to sell the property.<\/p>\n