Cost basis
The basis of property you buy is usually its cost. For real estate, that includes most settlement fees and closing costs for buying the property, such as:
- abstract fees and legal fees for the title search and sales contract,
- recording fees and surveys,
- transfer taxes and owner's title insurance.
Costs of getting the loan are not part of basis: points, mortgage insurance premiums and credit report fees, for example.
Adjusted basis
Basis changes while you own the property.
- Increases: capital improvements, such as an addition, replacing an entire roof, paving a driveway, installing central air conditioning or rewiring the home. Local assessments for improvements like sidewalks or water connections also add to basis.
- Decreases: depreciation you deducted or could have deducted (on a rental or business property), insurance reimbursements for casualty losses, and any deductible casualty loss not covered by insurance.
Example: a home and a rental
You buy a house for $300,000 and pay $5,000 of qualifying settlement costs. Basis: $305,000. You add a $40,000 addition: adjusted basis $345,000. Sell for $420,000 with $25,000 of selling costs, and your gain is $420,000 − $25,000 − $345,000 = $50,000.
If the same house had been a rental and you'd been allowed $30,000 of depreciation, the adjusted basis would be $315,000 and the gain $80,000. Estimate the tax with the capital gains tax calculator.
Gifted property: the donor's adjusted basis
If someone gives you property, you generally take over their basis. Which number you use depends on whether the property was worth more or less than the donor's adjusted basis on the day of the gift.
| Situation at the time of the gift | Basis for figuring a gain | Basis for figuring a loss |
|---|---|---|
| Fair market value (FMV) equal to or more than the donor's adjusted basis | Donor's adjusted basis, plus part of any gift tax paid | Same |
| FMV less than the donor's adjusted basis | Donor's adjusted basis | FMV on the date of the gift |
The second row is the dual-basis rule. It stops people from passing a built-in loss to someone else. IRS example: land with a donor basis of $10,000 is worth $8,000 when given to you.
| You later sell for | Result |
|---|---|
| $12,000 | $2,000 gain (using the $10,000 donor basis) |
| $7,000 | $1,000 loss (using the $8,000 FMV) |
| $9,000 | No gain and no loss |
A sale anywhere between the two bases produces neither a gain nor a loss. When the gift was worth more than the donor's basis and gift tax was paid, you add the part of the gift tax that relates to the increase in value (for gifts after 1976). Publication 551 shows the calculation.
Inherited property: stepped-up basis
For inherited property, basis is generally the fair market value on the date of the person's death, not what they paid. This is often called a stepped-up basis, because property usually has risen in value. Example: a parent bought a house for $90,000; it's worth $400,000 when they die. Your basis is $400,000, so selling soon afterward for $400,000 produces little or no taxable gain. The estate's personal representative can elect an alternate valuation date instead, and special rules apply to some farm and business property and conservation easements.
Keep records
Keep closing statements, receipts for improvements and depreciation records for as long as you own the property and for several years after you sell. For gifts, ask the donor for their purchase records and improvement receipts.
Source: IRS Publication 551, Basis of Assets (revised December 2025). This is general information, not tax advice.
Every worked example on this page was checked with Calcist's own engine and an independent reference.