Cost Basis: Overview, How to Calculate, Example

By Kristi Waterworth – Updated Apr 3, 2025 at 10:59 AM

Key Points

Cost basis affects capital gains taxes on investments.
Cost basis varies by investment type and whether you purchased the asset or received it as a gift or inheritance.
Optimizing cost basis can significantly reduce an investor’s tax liability.

When you're buying and selling investments, it's important to know what happens to your gains when tax time rolls around. That's why having a clear understanding of cost basis is so vital. Read on to learn more about this tax concept and how it applies to you.

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For real estate, it's more complicated. If it's an investment property, you'll start with the price you paid for the property, add in any improvements that you've made to increase the value of the property, and that will become your new cost basis. So, if you bought a duplex for $500,000 and spent another $100,000 remodeling it for your new tenants, your cost basis at that point is $600,000.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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