Tax Basis in a 1031 exchange refers to the cost of a property that is used to calculate any capital gains tax owed upon its sale. It is also known as the “tax cost” of a property.
Example
If a property was purchased for $100,000 and the owner incurs $20,000 in capital improvements and $10,000 in selling expenses, the tax basis of the property would be $130,000.
Tips
- Keep good records: Good record keeping is essential when calculating tax basis. Proper documentation is needed to support the cost of the property and to minimize the risk of a tax audit.
- Consider capital improvements: Capital improvements, such as renovations or upgrades, should be taken into account when calculating the tax basis of a property.
Advice
- Consult with a professional: Consider seeking the advice of a tax professional to ensure that the tax basis is calculated correctly and to minimize the risk of any tax implications.
- Stay informed: Stay informed of any changes in tax laws that may impact the calculation of tax basis.
Recommendations
- Plan ahead: Consider the potential tax implications of a 1031 exchange when planning the investment and allocate sufficient resources for taxes if necessary.
- Review the tax basis regularly: Review the tax basis regularly to ensure that it is accurate and up-to-date. This can help to minimize the risk of any tax liabilities upon the sale of the property.
