How to Calculate Adjusted Basis on Your Primary Residence
When you go to sell your primary residence, calculating your adjusted basis is an essential step in determining whether you’ll owe capital gains taxes. The adjusted basis represents your investment in the property and is used to calculate your taxable gain or loss upon sale.
So whether you’re thinking about selling your home or just want to know what to track while you own the home to make selling easier in the future, this article explains what the adjusted basis is, how it’s calculated, and why it matters for homeowners.
What is "Adjusted Basis"?
Your basis is generally what you paid for the home. Your adjusted basis is the original cost plus improvements and certain expenses, minus certain deductions. It reflects your true investment in the property for tax purposes and is used to calculate capital gains when you sell.
Capital Gain = Sale Price – Selling Expenses – Adjusted Basis
If the result is a gain, you may be eligible for the Section 121 Exclusion to exclude up to $250,000 ($500,000 if married filing jointly) from tax under the primary residence exclusion, assuming you meet the ownership and use tests.
However, any amount above this exclusion or if the home isn’t eligible for the exclusion is subject to capital gains taxation.
Step-by-Step: How to Calculate Adjusted Basis
1. Start with Your Purchase Price
This includes:
- The purchase price listed on the settlement statement (HUD-1 or Closing Disclosure).
- Certain closing costs, such as title fees and legal fees, if not already deducted elsewhere.
2. Add Acquisition Costs
These are costs associated with buying the home that can be added to your basis:
- Title insurance
- Recording fees
- Survey fees
- Transfer taxes or stamps
- Abstract fees
- Legal fees related to the purchase
3. Add Capital Improvements
Capital improvements are permanent enhancements that add value, prolong the home’s life, or adapt it to new uses. They must still be part of the home at the time of sale.
Examples include:
- Room additions
- New roof
- HVAC replacement
- Kitchen remodel
- New windows or doors
- Landscaping (if permanent)
❌ Do not include routine repairs or maintenance (like painting or fixing leaks) do not count.
4. Subtract Adjustments (if applicable)
These include:
- Depreciation (if you used part of your home for business or rented it out)
- Casualty losses previously claimed on your taxes
- Insurance reimbursements for losses not reinvested in the home
Example
Let’s say you bought your home in 2012 and are now preparing to sell it. Here’s how your adjusted basis would be calculated:
1. Original Purchase Price
You purchased the home for $300,000.
2. Add Acquisition Costs
At the time of purchase, you paid additional costs that can be included in your basis:
- Title insurance: $1,200
- Recording fees: $300
- Legal fees related to purchase: $1,000
- Transfer taxes: $1,500
Total acquisition costs: $4,000
Subtotal: $300,000 + $4,000 = $304,000
3. Add Capital Improvements Over Time
Over the years, you made several qualifying improvements:
- Finished the basement: $20,000
- Replaced the roof: $12,000
- Installed energy-efficient windows: $8,000
- Upgraded kitchen appliances and countertops: $10,000
Total capital improvements: $50,000
Subtotal: $304,000 + $50,000 = $354,000
4. Subtract Adjustments
You rented out a portion of your basement for 3 years and claimed depreciation:
- Depreciation claimed for home office/rental use: $10,000
Adjusted Basis = $354,000 – $10,000 = $344,000
5. Calculate Gains
If you sell the home for $600,000 and incur $40,000 in selling expenses (agent commission, staging, etc.), your capital gain would be calculated as:
Sale Price: $600,000
Minus Selling Expenses: – $40,000
Net Sale Proceeds: $560,000
Minus Adjusted Basis: – $344,000
Capital Gain: = $216,000
If the property qualifies for Section 121 Exclusion, all of this capital gain would be exempt.
However, if the property doesn’t qualify, or if the gains exceed the exclusion, capital gains taxation will need to be accounted for.
Expenses That Do or Do Not Increase Basis
⬆️Increase
Capital Improvements
These must still be part of the home when sold:
- Room additions (e.g., new bedroom, bathroom)
- Finished basement or attic
- New roof or insulation
- HVAC systems (furnace, central air)
- Electrical rewiring or plumbing upgrades
- Kitchen or bathroom remodels
- Permanent landscaping (e.g., retaining wall, sprinkler system)
- Driveway, walkway, or patio installation
- New siding or energy-efficient windows
- Accessibility improvements (e.g., ramps, wider doors)
Acquisition Costs (from original purchase)
- Title insurance
- Transfer taxes
- Recording fees
- Legal fees related to the purchase
- Abstract of title
- Survey fees
Certain Assessments
- Local improvements assessed by the government, such as:
- Sidewalk installations
- Water or sewer line hookups
Restoration After Casualty (if not deducted on taxes)
- Repairs after fire, storm, or other casualty—only if not deducted as a casualty loss
No Impact
Repairs and Maintenance
- Painting (interior or exterior)
- Fixing gutters or leaks
- Replacing broken windows
- Patching walls
- Replacing a few shingles
- Cleaning or minor repairs
Decorative or Temporary Changes
- Wallpapering
- Carpet cleaning
- Installing removable items (like curtains or temporary blinds)
Non-Capital Closing Costs
- Mortgage points or loan origination fees
- Escrow deposits for property taxes or insurance
- Homeowner’s insurance premiums
- Appraisal fees (for mortgage, not part of title work)
- Home inspection fees
Personal Costs
- Moving expenses
- Homeowners’ association (HOA) dues
- Home warranty premiums
- Cost of utilities
Losses or Deductions Already Claimed
- Insurance reimbursements for casualty losses
- Amounts deducted for:
- Casualty losses (if previously claimed)
- Home office depreciation
- Rental depreciation
For more information, see Publication 523, Selling Your Home | Internal Revenue Service