Basis is the amount of your investment in a property. For tax purposes, use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale or exchange of the property.

The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, debt obligations, other property or services. Cost includes sales tax and other expenses connected with the purchase. Your basis in some assets cannot be determined by cost. If you acquire property other than through a purchase, you should refer to Publication 551 (PDF), Basis of Assets, for more information.

If you buy stocks or bonds your basis is the purchase price plus any additional costs such as commissions and recording or transfer fees. If you have stocks or bonds that you did not purchase, your basis is usually determined by their fair market value or the previous owner's adjusted basis. Refer to Publication 550 (PDF), Investment Income and Expenses, for more information. For information on the basis of mutual fund shares, refer to Publication 564 (PDF), Mutual Fund Distributions.

Before figuring gain or loss on a sale, exchange, or other disposition of property, or figuring allowable depreciation, you must usually determine the adjusted basis of that property. Certain events that occur during your period of ownership may increase or decrease your basis, resulting in an "adjusted basis". Increase your basis by items such as the cost of improvements that add to the value of the property, and decrease it by items such as depreciation allowable, and insurance reimbursements for casualty and theft losses.

When you hold property for personal use and change it to business use or use it to produce income (such as renting out your former home), your basis for depreciation is the lesser of the fair market value of the property on the date of the change, or your adjusted basis on the date of the change.

For more information on basis and adjusted basis, refer to Publication 551 (PDF).

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