Basis
What does "Basis" mean in law?
Basis is the taxpayer's investment in property for tax purposes, used to compute gain or loss upon disposition and to calculate depreciation deductions. Under IRC Section 1012, the initial basis of purchased property is generally its cost. Basis is adjusted upward for capital improvements and certain other expenditures, and downward for depreciation, casualty losses, and other recoveries of capital under Section 1016. Special basis rules apply in particular contexts: inherited property receives a stepped-up basis to fair market value at death (Section 1014), gifted property generally takes a carryover basis from the donor (Section 1015), and property received in like-kind exchanges takes a substituted basis (Section 1031).
Definition
Basis is the taxpayer's investment in property for tax purposes, used to compute gain or loss upon disposition and to calculate depreciation deductions. Under IRC Section 1012, the initial basis of purchased property is generally its cost. Basis is adjusted upward for capital improvements and certain other expenditures, and downward for depreciation, casualty losses, and other recoveries of capital under Section 1016. Special basis rules apply in particular contexts: inherited property receives a stepped-up basis to fair market value at death (Section 1014), gifted property generally takes a carryover basis from the donor (Section 1015), and property received in like-kind exchanges takes a substituted basis (Section 1031).
Example
A homeowner who purchased a house for $300,000 and added a $50,000 kitchen renovation has an adjusted basis of $350,000, meaning she will recognize gain only on sale proceeds exceeding that amount.