Base value is the calculation of an owner’s investment in tangible assets used to determine property appreciation taxes when sold. The US tax code defines the calculation, and taxpayers must maintain accurate records to avoid fines.
Base value is the calculation of an owner’s current investment in tangible assets. It is the determination of what taxing authorities will consider the baseline value of the property when acquired for purposes of paying property appreciation taxes when the property is sold. The base calculation is also used by companies to carry tangible assets to the books in anticipation of paying taxes. In a business context, the terms book value or book value are analogous to basis value.
The calculation of the property base is specifically defined by the US tax code. While the same assessment technique is used in other contexts around the world, the most widespread use is in the US as part of preparing federal income tax returns for individuals and corporations. The tax code requires taxpayers to pay taxes on the appreciating value of the property when it is sold. This appreciation is known as a capital gain. To determine the amount of the gain, the baseline amount, or base amount, must be established.
The basis is determined based on how the property is acquired. If the property is purchased as part of a sale, the base value will be the sale price. The base value of inherited property is the fair market value of the property at the time of the donor’s death, while the basis of a gift or trust is transferred from its previous owner. Throughout the ownership of the property, the base is adjusted. It increases as a result of capital property improvements and decreases as a result of tax deductions such as depreciation, depletion or casualty losses.
The adjusted basis is used at the time of sale to determine the amount of taxes due. Taxable gain or loss is the sale price of the property less the adjustment basis. Taxes are due on the incremental increase in property value, not on the current total sale price or current fair market value. In this way, a capital gains tax is very similar to the value added tax used in countries like the UK.
Keeping a record of the basis and adjusted basis of ownership is the responsibility of the taxpayer. Regardless of whether the taxpayer is an individual or a business, tax authorities require that adequate records be maintained to establish the correct basis to be used in the sale. Incorrectly tracking the base amount can subject the taxpayer to significant fines and fines.
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