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Basis value is the calculation of an owner's current investment in tangible property. It is the determination of what tax authorities will consider to be the base line value of the property when acquired for purposes of paying taxes on the property's appreciation in value once the property is sold. The basis calculation is also used by companies to carry tangible assets on the books in anticipation of eventually paying taxes. In a business context, the terms book value or carrying value are analogous to basis value.
The calculation of the basis of property is specifically defined by the US tax code. Although the same valuation technique is used in other contexts around the world, the most systematized use is in the US as part of the preparation of federal income tax returns for individuals and businesses. The tax code requires taxpayers to pay taxes on the appreciated value of property when it is sold. This appreciation is known as a capital gain. In order to determine the amount of the gain, the base line value, or basis value, must be established.
Basis is determined based on how the property is acquired. If the property is purchased as part of a sale, the basis value is the sales price. The basis value of inherited property is the fair market value of the property at the time of the donor's death, while the basis of a gift or trust is carried over from its previous owner. Over the course of ownership of the property, the basis is adjusted. It increases as a result of making capital improvements to the property and decreases as a result of tax deductions, such as depreciation, depletion, or casualty losses.
The adjusted basis is used at the time of sale to determine the amount of taxes owed. Taxable gain or loss is the sales price of the property minus the adjust basis. Taxes are owed on the incremental increase in value of the property, not on the current total sales price or current fair market value. In this way, a capital gains tax is much like a value-added tax that is used in countries such as the UK.
Maintaining a record of the basis and adjusted basis of property is the responsibility of the taxpayer. Whether the taxpayer is an individual or business, tax authorities require adequate records be kept to establish the correct basis to use upon sale. Incorrectly tracking basis value can subject the taxpayer to significant fines and penalties.
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