What is Adjusted Basis?

Adjusted basis refers to the increase or decrease in an asset's value due to depreciation or capital enhancements.

How Does Adjusted Basis Work?

From the time an asset is acquired until the time it is sold, an asset experiences a number of events which affect its value. These events can cause an increase or decrease in the asset's total value. An asset's adjusted basis takes the base price of an asset and adjusts it for changes in value reflecting enhancements and or depreciation. For instance, a given asset purchased for $100 that is sold one year later after having experienced $10 in depreciation and $50 in improvements would have an adjusted basis of $100 - $10 + $50 = $140.

Why Does Adjusted Basis Matter?

In the event an asset is sold, the adjusted basis is needed for tax purposes as it is used to calculate the capital gain or loss.