Cost Basis

Cost basis is the tax starting value of property you own, normally what you paid for it plus some of the costs of buying it. On a rental, that figure is divided into land and building, and only the building share gets depreciated. It is the starting point for measuring a gain or loss on sale.

The default house has a $500,000 purchase price, allocated $100,000 to land and $400,000 to the building. Some closing costs, such as title fees and recording charges, are typically added to basis rather than deducted. Loan costs follow separate rules.

Basis has nothing to do with NOI or market value. A property bought for $500,000 and later worth $600,000 on its NOI still has a $500,000 starting basis. The gap between value and basis is what creates a taxable gain when the property is sold.