Adjusted Basis

Adjusted basis is the tax cost basis of a commercial property after accounting for additions and subtractions that affect taxable gain and allowable depreciation. For CRE, it begins with acquisition cost plus capital improvements and certain acquisition expenses, then subtracts cumulative depreciation, casualty losses claimed, and other permitted reductions. Lenders and borrowers use adjusted basis to estimate taxable gain on disposition, calculate depreciation schedules, and project tax liabilities that can influence loan structuring, cash flow projections, and anticipated proceeds at sale or refinance.

When evaluating a loan or refinancing, underwriters and sponsors calculate adjusted basis to model after-tax proceeds and to determine remaining depreciation deductions available to the borrower or entity. Adjusted basis feeds into pro forma scenarios used in yield analyses and equity return models; it determines the tax impact of a sale or exchange and helps set loan covenants tied to loan-to-value or debt-service coverage ratios that consider likely net proceeds. Accurate adjusted basis also supports due diligence on historical capital expenditures and depreciation claimed by the borrower.

Adjusted basis matters because it directly affects the taxable gain on disposition and the remaining depreciation tax shield, both of which influence an owner’s net proceeds and cash flow available to service debt. For lenders, understanding adjusted basis clarifies the borrower’s economic position and potential repayment sources at sale or refinance. For sponsors and investors, it informs after-tax returns and structuring decisions such as whether to pursue a 1031 exchange, make capital improvements, or time a sale to optimize tax outcomes. Misstating adjusted basis can materially distort underwriting and investment appraisal.