The Advantages of Calculating Cost Basis: What Is It & Why Should I Have It?
One way that sets Green Donation Consultants apart from other personal property appraisal companies is to include a cost basis calculation with our qualified appraisal documents. This is often an extra cost if other companies even provide this service. Our appraisal reports itemize each item line by line, and we provide the cost basis of each donated portion of the property. This attention to detail is just one way we go the extra mile for our clients. It is important to note that the GDC team always recommends speaking with a tax professional about benefits and tax liabilities that may apply in your unique situation.
What Is a Cost Basis Calculation?
According to Investopedia, the cost basis is the original value of an asset for tax purposes, usually the purchase price, adjusted for several factors. This value is used to determine the capital gain, which is equal to the difference between the asset’s cost basis and the current market value.
The cost basis is achieved in a few steps:
- First, we determine the fair market value of each line item.
- We then calculate the assessed value for the structure based on the tax assessment done the year of the donation (or prior year, depending on the date.) The structure is a percentage of the total bill and is consistently listed separately on the assessment. By dividing the structure’s value by the full assessed value, we come up with a percentage.
- If we take that percentage and multiply it by the price that the house was initially purchased for, we get the cost of the structure alone at the time of purchase.
- By multiplying that number times the percentage for each line item, we get the cost basis for each line item, which we can then add together to get our total cost basis.
The value that can be deducted for a non-cash charitable donation is the lessor of either the cost basis or the fair market value (FMV) if donated material has been owned for less than one year. If the donated property was owned for more than one year, the donor is entitled to take the FMV.
Why Should I Have It?
Tax court precedent requires donors of non-cash charitable donations to keep a record of a line-by-line is comparing the FMV to the Cost Basis is a required document in the event of an audit. The cost-basis calculation is to be kept along with the donor’s other tax receipts. It does not have to be sent in with the 8283 to receive your tax deduction through the IRS. Although to err on the side of caution, there is no detriment to including it with your tax documents.