What is Unadjusted Basis?
Unadjusted basis refers to the original cost to purchase an asset. This amount includes not only the initial price the purchaser paid to acquire the asset but also includes other costs such as expenses and liabilities assumed to purchase it. Unadjusted basis is used mostly in accounting nomenclature and is akin to the concept of cost basis.
Understanding Unadjusted Basis
Unadjusted basis is the initial value assigned to an asset. It includes the cash cost or price of an asset, any liability assumed to acquire the asset, any asset the purchaser gave to the seller as part of the transaction, and any purchase expenses incurred to acquire the asset. Purchase expenses may include commissions, fees, survey costs, transfer taxes, or title insurance, for example.
Example of Unadjusted Basis
Sam purchased a building from Emily using $100,000 in cash and a $50,000 mortgage. As part of the purchase agreement, Sam also paid $1,000 in property taxes attributed to a period of time in which Emily was still the owner of the property. Total closing costs and fees for Sam to purchase this property were $4,000. Sam’s unadjusted basis for this property is $100,000 + $50,000 + $1,000 + $4,000 = $155,000.
Unadjusted Basis in Practice
The unadjusted basis is used to calculate the gain on the sale of an asset. Extending Sam’s purchase example above, assume Sam later sold this piece of property for $175,000, after costs and fees associated with the sale. He could determine his return on investment by calculating the profit on the investment. He earned $20,000 ($175,000 - $155,000) net of expenses on this investment, which equates to a 12.9% return on investment ((($175,000 - $155,000)/$155,000)).
Unadjusted basis is also the starting point for determining depreciation on an asset, such as a plant or piece of manufacturing equipment, in accelerated depreciation methods. Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in the value of the asset over time. Accelerated depreciation methods allow the deduction of higher expenses from the unadjusted basis in the first years after purchase and lower expenses as the depreciated item ages.
Related Terms: adjusted basis, cost basis, depreciation, accelerated depreciation, return on investment
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is "unadjusted basis" most commonly used to determine in financial context?
- [ ] Fair market value
- [x] Initial investment value or purchase price of an asset
- [ ] Projected income
- [ ] Depreciation rate
## Which of the following is excluded in the unadjusted basis of an asset?
- [x] Adjustments for depreciation
- [ ] Original purchase price
- [ ] Transaction fees
- [ ] Seller concessions
## When calculating the unadjusted basis, which component is considered?
- [ ] Improvements made to the asset
- [ ] Accrued depreciation
- [x] Purchase price without adjustments
- [ ] Gain on the sale of the asset
## Which of the following scenarios would primarily involve using unadjusted basis?
- [ ] Calculating the future sell price
- [ ] Estimating gross rent yield
- [x] Establishing initial cost for tax purposes
- [ ] Determining insurance coverage amounts
## The unadjusted basis is typically relevant in which phase of an asset's lifecycle?
- [x] At the time of acquisition
- [ ] During periodic maintenance
- [ ] Upon disposal or sale
- [ ] During any refinancing
## For tax reporting purposes, which basis might frequently follow the calculation of the unadjusted basis?
- [ ] Liquidation value basis
- [x] Adjusted basis
- [ ] Book value basis
- [ ] Replacement cost basis
## In the context of real property, what does the unadjusted basis exclude?
- [x] Later capital improvements to the property
- [ ] Property taxes
- [ ] Loan interest
- [ ] Original purchase price
## What does the unadjusted basis not take into account?
- [ ] Initial purchase cost of an asset
- [ ] Freight charges for asset delivery
- [x] Annual property tax payments
- [ ] Sales commissions
## How does the unadjusted basis impact the figured gain or loss on the sale of an asset?
- [ ] It determines the sale price.
- [ ] It ensures market fluency.
- [x] It is used as the initial value before subtracting venue.
- [ ] It adjusts sale price to mitigate tax dues.
## What is the primary difference between unadjusted basis and adjusted basis?
- [ ] Adjusted basis includes selling expenses whereas unadjusted basis does not.
- [x] Adjusted basis includes modifications for certain events affecting the asset’s value over time, unadjusted does not.
- [ ] Adjusted basis reflects market fluctuations while unadjusted basis does not.
- [ ] Adjusted basis involves tax exemption amounts that unadjusted basis does not consider.
