Cost Basis
Cost basis is what you originally paid for a property, including purchase price and acquisition costs, and it is the starting point for calculating gain.
Definition
Cost basis is your original investment in a property for tax purposes. It generally equals the purchase price plus acquisition costs like legal fees, title charges, transfer taxes, and certain closing expenses. It is the foundation from which adjusted basis, and ultimately taxable gain, is calculated.
Over time, cost basis is adjusted upward for capital improvements and downward for depreciation, giving you adjusted basis. When you sell, subtracting adjusted basis from the sale price yields your gain. If you buy a rental for $500,000 and pay $20,000 in closing costs, your starting cost basis is $520,000.
How basis is established matters enormously in a 1031 exchange, where the old property's basis carries into the replacement, and in inheritance, where heirs receive a stepped-up basis equal to fair market value at death. Keeping thorough records of basis is essential to avoid overpaying tax later.
Key points
- Original purchase price plus acquisition and closing costs
- Starting point before improvements and depreciation adjustments
- Used to calculate taxable gain at sale
- Carries over to 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.