Base value is an estimate of an owner’s current investment in tangible property.
Base value is an estimate of an owner’s current investment in tangible property. It is the determination of what the taxing authorities will consider to be the base value of the property when it is acquired for purposes of paying taxes on the appreciation of the property once the property is sold. Companies also use the basis calculation to account for tangible assets in anticipation of tax payments. In a business context, the terms book value or book value are analogous to basis value.
The property basis calculation is specifically defined by the US tax code. While the same assessment technique is used in other contexts around the world, the most consistent use is in the United States as part of the preparation of federal income tax returns for individuals and corporations. The tax code requires taxpayers to pay taxes on the appraised value of the property when it is sold. This appreciation is known as a capital gain. To determine the gain value, the reference value or reference value must be set.
The basis is determined based on how the property is acquired. If the property is purchased as part of a sale, the base value is the sales 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 base value of an endowment or trust is inherited from its previous owner. In the course of ownership of the property, the basis is adjusted. It increases as a result of capital improvements on the property 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. The taxable gain or loss is the sales price of the property less the basis of adjustment. Taxes are paid on the incremental increase in property value, not on the current full sales price or current fair market value. In this way, a capital gains tax is very similar to a value added tax used in countries like the UK.
The maintenance of the registry of the basis and the adjusted basis of equity is the responsibility of the taxpayer. Whether the taxpayer is an individual or a corporation, the tax authorities require proper records to be kept to establish the correct basis to use in the sale. Improper tracking of the base amount can subject the taxpayer to significant fines and penalties.