In real estate, the adjusted tax basis determines what a home is worth for tax reporting purposes after a sale is concluded. The formula for calculating the adjusted tax basis is as follows: net proceeds of the sale – (original purchase price + cost of improvements – casualty losses) = adjusted tax basis.
Example: Tim buys a home for $300,000 and makes $50,000 worth of improvements to the property. He incurs $20,000 worth of storm damage, which is reimbursed through insurance. He then sells it for $450,000. His total adjusted basis is $120,000 ($450,000 – ($300,000 + $50,000 - $20,000).