Basis is essentially the adjusted cost of a house, including the purchase price plus any capital improvements that have been made. To calculate basis, add the amount you paid for your home to the cost of any capital investments made since that time.

For example, if you purchase your home for $150,000 and later add an addition at a cost of $25,000, your new basis is $175,000. You would need to realize net sales proceeds in excess of $175,000 to have a capital gain on the sale.

Basis can also be reduced from the original purchase price if a portion of a property is sold (for example, if the land was large enough to create an extra building lot that was sold).

Always keep proper records of improvement expenses on your home in case you are ever called upon to justify your cost basis.