In my prior career-life I was a CPA. Today we are going to indulge a bit of my inner finance-geek in our discussion of Basis and how it can relate to your estate plan.
I recently asked one of my non-accountant friends to define Basis for me and received the following reply:
Basis is like the foundation – Because the basis of an argument would be the foundation, right!?
Well ... somewhat.
In accounting, Basis measures you (the owner)’s investment in a piece of property.
For example, if I purchase a piece of land (in dream world) for $100; my basis in that property is …
…..
…..
…..
$100.
Now let’s say I purchase a piece of land for $100 and then spend an additional $20 adding a fence around a portion. Now my basis in the land would be $120.
If, instead, I purchased land for $120 that already had a fence in place, but that fence was somewhat in disrepair, and I spend $10 to repair the fence … my basis is …. $120. Repair costs do not get added to your basis.
Only improvements add to basis.
There are far more complicated rules for calculating basis in stock that has perhaps split or paid dividends and been reinvested. Or the basis in a partnership interest where the owner may have contributed both cash and equipment and time to the business, and have removed income or dividends from that business. Your friendly neighborhood CPA can help you sort out these and other unique circumstances.
For your estate planning purposes, however the general rule is important to know -
Basis is the value that you have invested in a piece of property (real, investment, or otherwise)
Check back next post for an explanation of the two types of basis in non-purchased assets.
