You're So Basis

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If you're a property owner, real estate investor or have bought or sold any type of personal property, whether it be realty or personalty, then you've probably been fully aware of the concept of basis in a property.

Basis, in all definition is a taxpayer's current investment in a property not represented in liquidity. The basis in a property is the foundation used to compute the depreciation, ad valorem taxes, amortization, depletion and loss. So to answer your question of why is basis important...well, there you go. Basically trying to figure depreciation on a property without knowing its basis is like trying to bake a cake without your binder. It simply cannot be done. The term "basis" is derived from base, and is exactly what it is when figuring the financials behind the capital asset.

So how is basis determined? Well first you must understand the two different types of basis: Cost Basis and Adjusted Basis.

The cost basis is the initial basis a taxpayer holds as stake in the asset. The cost basis is the price that you paid for the asset. Assuming the asset was sold at Fair Market Value to an unrelated party with no adjustments for bias (this is what's known as an arm's-length transaction and is generally the most ideal for computing and deducing an equitable basis), this is generally the most objective or subjective figure (depending on whether the property was appraised for investment purpose or economic purpose). Now, other methods of tax recognition for transactions made at non-arm's-length, I will discuss in another post.

As you know, assets, especially real assets (real estate/real property) do not stay stagnant. As the property gets older, wear and tear takes its toll and the valued representation must be accounted for in the value of the property. Depending on the types of calculations done, the accounts are known as depreciation or amortization. These will then decrease the basis in the property, thus resulting in what they call "decrease to basis." This is one example of decrease to basis. The result is "adjusted basis."

As the asset will also have to take account for wear and tear, the asset must also take account for improvements and changes to the property. These may be aspects such as renovation, construction or replacement of a built-in asset (an asset that is attached to the property and cannot be removed without causing substantial damage). These attribute to an increase in basis (as opposed to a decrease in basis). However, the resulting figure is also known as adjusted basis.

The adjusted basis of your property is generally what ad valorem taxes are computed based upon. This also determines other figures such as net worth and can also be taken into consideration when looking to tax plan and adjust your property taxes for the future.

PVA can help you determine the true basis of your property based on a fair and equitable value. However, there are other appraisal and valuation companies you can also find nearby to help you with such calculations as well.