Cost basis is the dollar amount assigned to property at the time it is purchased under the Internal Revenue Code’s guidelines. This dollar amount is the basis for determining the owner’s gain or loss when they sell the property. It is also used to calculate the depreciation of the property for income tax purposes. That is, the IRS arbitrarily assumes that a property completely depreciates to be worth nothing in 27.5 years. To help the investor make improvements and maintain the property, the IRS allows the investor to deduct roughly 1/27th of the value of their property each year from their income taxes.
Adjusted basis is the cost basis after the application of certain additions for improvements, etc., and deductions for depreciation, etc.
