Tax basis, in the context of commercial real estate, is the original purchase price or cost of an investment property plus any out-of-pocket expenses or closing costs related to the acquisition of the property. Also known as “cost basis”.
It is important to note that a taxpayer’s tax basis in a given asset may include several other adjusting factors such as accumulated depreciation deductions claimed during the time of ownership or the value of deferred capital gains from 1031 exchanges executing during the acquisition of the asset.
To calculate the tax basis of a property start with the cost basis, add any capital expenditures made during ownership and subtract accumulated depreciation. For example, if an investor purchases a multifamily investment property for $2,000,000, incurs $100,000 of closing costs with the purchase, later replaces the roof at a cost of $250,000 and claims a total of $625,000 in depreciation allowance, then the investor's tax basis in the property would be $1,725,000 ($2,000,000 purchase price plus $100,000 closing costs plus $250,000 capital improvements less $625,000 accumulated depreciation).
