In a simple case, the basis of property for tax purposes under the INTERNAL REVENUE CODE is the purchase price of a piece of property. For example, if a taxpayer purchases a parcel of land for $500,000, and no deductions apply to that parcel of land, the taxpayer's basis is $500,000. If the taxpayer later sells the property for $550,000, the amount of gain realized by the transaction is the sale price ($550,000) less the adjusted basis ($500,000), or $50,000.
Where a taxpayer is allowed to depreciate property with a limited useful life, such as an automobile used primarily for business purposes, the taxpayer's adjusted basis is reduced. Assume a taxpayer purchases an automobile for $30,000, and then claims deductions for $5,000. The adjusted basis of the automobile is then reduced to $25,000. When the taxpayer sells the automobile for $26,000, the amount of gain realized is $1,000 (the sale price of $26,000 minus the adjusted basis of $25,000).
FURTHER READINGS
Bankman, Joseph et al. 2002. Federal Income Tax: Examples and Explanations. New York: Aspen Law & Business.
Hudson, David M., and Stephen A. Lind. 2002. Federal Income Taxation. St. Paul, Minn.: West.
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