Adjusted Basis
Adjusted basis is your original cost in a property increased by improvements and reduced by depreciation, used to calculate taxable gain when you sell.
Definition
Adjusted basis is your investment in a property for tax purposes after accounting for changes over time. You start with cost basis, generally the purchase price plus acquisition costs, then add capital improvements and subtract depreciation deductions taken during ownership.
It is the number that drives your taxable gain: sale price minus adjusted basis equals your gain. Because depreciation lowers basis every year, a long-held rental can have a much lower adjusted basis than its purchase price, inflating the taxable gain at sale. For example, a building bought for $800,000 with $200,000 of depreciation taken has a $600,000 adjusted basis; selling for $1 million produces a $400,000 gain.
In a 1031 exchange, the old property's adjusted basis carries over into the replacement, with adjustments, which is how tax deferral is preserved. Understanding adjusted basis is essential to estimating what an exchange actually saves.
Key points
- Starts with cost basis, then adjusts for improvements and depreciation
- Sale price minus adjusted basis equals taxable gain
- Depreciation lowers basis, increasing gain at sale
- Carries over into replacement property in a 1031 exchange
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.