Unadjusted basis

Unadjusted basis is the original cost assigned to an asset at the time of purchase. It represents the starting value for tax and accounting purposes and typically equals the cash price paid plus certain costs and liabilities assumed to acquire the asset.

What it includes

Unadjusted basis generally comprises:
Cash or other consideration paid for the asset.
 Liabilities assumed (for example, a mortgage taken on the property).
Property or other assets given in exchange.
 Purchase expenses directly related to acquisition, such as commissions, legal fees, survey costs, transfer taxes, and title insurance.

How to calculate

Basic formula:
Unadjusted basis = Purchase price (cash or other consideration) + Liabilities assumed + Purchase expenses

Example

Sam buys a building by paying $100,000 cash, taking on a $50,000 mortgage, paying $1,000 in property taxes attributable to the prior owner’s period, and incurring $4,000 in closing costs.

Unadjusted basis = $100,000 + $50,000 + $1,000 + $4,000 = $155,000

If Sam later sells the building for $175,000, his gain (before other adjustments or taxes) is:
Gain = Sale proceeds − Unadjusted basis = $175,000 − $155,000 = $20,000
Return on investment = $20,000 / $155,000 ≈ 12.9%

Uses in accounting and tax

  • Determining gain or loss on sale: Unadjusted basis is the starting point for calculating taxable gain or loss when an asset is sold.
  • Depreciation: For depreciable assets, unadjusted basis is the initial amount from which depreciation deductions are computed. Subsequent adjustments (for improvements, depreciation taken, casualty losses, etc.) produce the adjusted basis.
  • Recordkeeping: Establishes a clear, auditable starting value for asset accounting.

Unadjusted basis vs. adjusted basis

  • Unadjusted basis: The original acquisition cost plus purchase-related items at the time of purchase.
  • Adjusted basis: The unadjusted basis after later increases (capital improvements, additional costs) or decreases (depreciation, casualty losses, certain credits). Adjusted basis is used for final gain/loss calculations and current tax reporting.

Key takeaways

  • Unadjusted basis is the asset’s original cost including assumed liabilities and purchase expenses.
  • It is the foundation for depreciation and for calculating gains or losses on sale.
  • Keep good records of purchase price and acquisition expenses to accurately establish the unadjusted basis and later compute the adjusted basis.