Absorption Basis

Acquisition Basis, also known as Cost Basis, is a term used in tax accounting to determine the cost of an asset for tax purposes. In real estate, the acquisition basis includes the purchase price of the property plus any associated costs incurred at the time of purchase.

The acquisition basis of a property includes:

Purchase price: The amount paid to the seller for the property.

Closing costs: Costs associated with the purchase transaction, such as legal fees, inspection fees, and title insurance.

Improvement costs: Any capital improvements made to the property that add value, extend its life, or adapt it to new uses. This does not include repairs or maintenance.

Here is the formula:

Acquisition Basis = Purchase Price + Closing Costs + Improvement Costs

The acquisition basis is used to calculate depreciation for investment properties and to determine capital gains or losses when the property is sold. When you sell a property, the difference between the sale price and the acquisition basis is the capital gain or loss.

It's important to keep accurate records of the purchase price, closing costs, and any improvements made to the property in order to correctly calculate the acquisition basis and any resulting capital gains or losses.