What Is Unadjusted Basis?
Let me explain what unadjusted basis means to you. It's the original cost you pay to buy an asset, and that includes not just the initial price but also other costs like expenses and any liabilities you take on during the purchase. You should know that adjusted basis is a related concept—it involves changes made to that original price over time. In accounting terms, unadjusted basis is basically the same as cost basis, and that's how it's mostly used.
Understanding Unadjusted Basis
Think of unadjusted basis as the starting value you assign to an asset. It covers the cash you paid or the price of the asset, plus any liability you assumed to get it, any asset you gave to the seller in the deal, and all the expenses tied to the purchase. Those expenses could be things like commissions, fees, survey costs, transfer taxes, or title insurance—whatever you had to pay to make the acquisition happen.
Example of Unadjusted Basis
Here's a straightforward example to show you how this works. Suppose Sam buys a building from Emily. He pays $100,000 in cash and takes on a $50,000 mortgage. As part of the agreement, Sam also covers $1,000 in property taxes that were due from when Emily still owned it. On top of that, his total closing costs and fees come to $4,000. So, Sam's unadjusted basis for the property adds up to $100,000 + $50,000 + $1,000 + $4,000, which equals $155,000.
Unadjusted Basis in Practice
You use unadjusted basis to figure out the gain when you sell an asset. Building on Sam's example, let's say he sells the property later for $175,000, after accounting for sale costs and fees. To find his return on investment, he calculates the profit: that's $175,000 minus $155,000, which gives him $20,000 net. That works out to a 12.9% return, calculated as ($175,000 - $155,000) divided by $155,000.
Unadjusted basis also serves as the foundation for depreciating an asset, like a plant or manufacturing equipment, especially with accelerated depreciation methods. Depreciation lets you spread out the cost of a tangible asset over its useful life to reflect its declining value. With accelerated methods, you deduct higher amounts from the unadjusted basis early on, then lower amounts as the asset gets older.
Other articles for you
A clawback is a contractual provision requiring the return of previously paid money, often with penalties, in cases of misconduct or poor performance.
Statistical significance determines if data results are due to chance or a real relationship between variables.
A buy limit order allows you to purchase a security only at or below a specified price to avoid overpaying.
A certificate of insurance (COI) is a document that verifies an active insurance policy and outlines its key details to prove coverage.
Liquidated damages are pre-specified sums in contracts to compensate for hard-to-quantify losses from breaches.
Long-term liabilities are financial obligations due more than a year in the future, listed separately on a company's balance sheet to assess liquidity and debt management.
Owner earnings run rate estimates a company's annual free cash flow based on current data, assuming consistent performance.
The Negative Volume Index (NVI) is a technical tool that tracks price changes on days with lower trading volume to reveal institutional investor influences.
A vulture capitalist is an investor who buys and revives or strips distressed companies for profit.
A Wells Notice is a formal SEC notification indicating planned enforcement actions for securities violations, allowing recipients to respond before charges are filed.