Best Practices for Tracking Cost Basis on Investments and Real Estate

Why cost basis matters

Cost basis determines how much of a sale proceeds are treated as taxable gain or deductible loss. When you sell a stock, mutual fund, or real estate, the capital gain equals the selling price minus your cost basis. Underreporting basis can lead to overpaying taxes; overstating basis can trigger IRS inquiries. Brokers report many sales to the IRS on Form 1099-B, but that reporting does not remove your obligation to keep supporting documentation and to adjust basis for improvements or depreciation (IRS, Form 8949 instructions; Publication 551).

In my practice as a CFP®, I regularly see clients who assume a broker’s number is gospel — then discover missing acquisition costs or excluded capital improvements only when they sell. That gap often means unnecessary tax and stress.

Sources: Internal Revenue Service — “Capital Gains and Losses” and “Basis of Assets (Publication 551)” (see links below).

Core components that change basis

• Purchase price: the cash or fair market value you gave when acquiring the asset. For inherited property, basis is usually stepped up (or down) to the date‑of‑death fair market value unless the estate elects an alternate valuation date (see IRS “Step-Up in Basis” discussion).
• Acquisition costs: brokerage commissions, transfer taxes, title fees, and some closing costs that add to basis for real estate.
• Capital improvements: costs that add value or extend useful life (e.g., room additions, new roof, major HVAC replacement) increase real estate basis. Ordinary repairs generally do not.
• Depreciation and other allowed or allowable deductions: if you claimed depreciation on a rental or business property, that reduces your adjusted basis and may trigger depreciation recapture on sale (IRS Publication 527 and Publication 551).
• Adjustments: casualty losses, tax credits affecting basis, and amortizable points or legal costs may also change adjusted basis.

How broker reporting and tax forms interact with basis

Broker-dealers report proceeds and, for many “covered” securities, they also report cost basis on Form 1099‑B to you and the IRS. This reporting has expanded since the early 2010s, but it doesn’t capture every adjustment (for example, transfer-in shares where your broker lacks original purchase information). You must still reconcile the broker’s 1099‑B with your records and report differences on Form 8949 and Schedule D as needed (IRS, Form 8949 instructions).

Key forms and where they fit:

• Form 1099‑B: broker report of proceeds and, sometimes, cost basis.
• Form 8949: use to reconcile transactions where the broker’s basis is missing or incorrect and to list adjustments.
• Schedule D: summary of capital gains and losses from Form 8949.

Always review every 1099‑B line item carefully. If your broker lists a basis that’s wrong (e.g., missing acquisition costs or not reflecting a corporate action), you are responsible for correcting it on your tax return.

Securities: methods for identifying which shares you sold

When you own multiple lots of the same security, the method you use to compute basis can materially affect tax. Typical methods:

• FIFO (First-In, First-Out): default method for many accounts when you don’t specify a different method. It assumes the earliest shares purchased are sold first.
• Specific Identification: you tell your broker which exact shares (by purchase date and lot) you are selling. This method can be used to manage gains or losses intentionally — for example, sell higher‑basis lots to reduce gains.
• Average Cost Basis: commonly used for mutual funds and some dividend reinvestment plans (DRIPs). The brokerage averages your cost across all shares for basis calculation.

Best practice: decide on a method and document it. If you use Specific Identification, make the election before or at the trade and retain confirmations that show which lots were sold. If you rely on average cost for funds, make sure your broker’s calculations match your own records.

Real estate: what to track and why

Real estate basis tracking requires more documents than many investors expect. Keep:

• Closing Disclosure or HUD-1/settlement statement showing purchase price and acquisition fees.
• Title insurance and transfer tax receipts.
• Contracts and receipts for capital improvements, with dates and descriptions.
• Records of casualty losses, insurance reimbursements, and any casualty repairs.
• Depreciation schedules (for rental property) showing prior depreciation claims — note: depreciation reduces basis and affects gain on sale.

Real estate example: you buy a rental for $250,000, pay $5,000 in closing costs that add to basis, and later spend $50,000 on qualifying capital improvements. Your adjusted basis before depreciation is $305,000. If you claimed $30,000 of depreciation over ownership, your adjusted basis at sale becomes $275,000. If you sell for $400,000, your recognized gain is $125,000, and part of that gain may be subject to depreciation recapture rules (see IRS Publication 527 and Publication 551).

Note on repairs vs improvements: routine maintenance is expensed when performed and doesn’t increase basis; structural changes or additions usually do.

Practical recordkeeping system (step‑by‑step)

1. Centralize records: pick a folder structure (physical or cloud) per asset or property. Example folders: Purchase docs, Improvements, Depreciation, Sale docs.
2. Use a spreadsheet template with these columns: Asset name, Acquisition date, Acquisition cost, Acquisition fees, Lot ID (for securities), Capital improvements (date/amount/description), Depreciation taken, Adjusted basis, Date sold, Sale proceeds, Supporting file links.
3. Capture documents at the time of transaction: scan closing disclosures, receipts, and brokerage confirmations immediately. Name files consistently (e.g., PropertyAddressYYYYMMDDInvoice.pdf).
4. Reconcile annually: review broker statements and 1099‑B each tax year; reconcile with your spreadsheet to spot missing basis information or incorrect lot identification.
5. Retention: keep tax returns and related records until at least three years after you file the return reporting the transaction; for real property and assets with depreciation, keep documents until three years after the year you dispose of the property (IRS guidance on recordkeeping).
6. Backups and audit readiness: keep at least two backups (local + cloud). If audited, provide the chain of documentary proof linking purchase to improvements and sale.

Recommended tools: modern broker portals with cost‑basis tracking, Quicken or personal finance software, and dedicated tax recordkeeping apps. When you move brokerages, export historical cost basis reports and transfer lot‑level data when possible.

Strategies to manage tax outcomes

• Use Specific Identification to harvest tax losses or choose higher‑basis lots to minimize gains when selling appreciated holdings.
• Time the sale of assets to manage short‑term vs long‑term capital gains: holding periods matter (long‑term rates typically apply after one year).
• For inherited assets, verify the estate’s valuation date and supporting appraisal for stepped‑up basis.
• For rental property, track capital improvements closely — they reduce gain and increase depreciation deductions, but also increase the risk of depreciation recapture on sale.

Common mistakes and how to avoid them

• Relying solely on a broker’s cost basis without retaining supporting documents. Solution: keep originals or scans of purchase confirmations, trade blotters, and closing statements.
• Failing to document capital improvements; many owners assume small projects aren’t important. Solution: log every improvement with receipts and photos when possible.
• Losing lot‑level trade history when transferring brokers. Solution: request a full historical cost‑basis report before initiating transfers and confirm lot transfer with both brokers.

When to get professional help

Consult a CPA or tax attorney if you: inherit complex assets, have a large portfolio with many lots or corporate actions, are selling depreciated business property, or face an IRS notice about basis discrepancies. In my practice, small upfront advisory fees to organize basis records often pay for themselves at sale time through reduced tax liability and fewer IRS issues.

Helpful internal resources

• For investment-specific rules and examples, see FinHelp’s “Investment Cost Basis” glossary entry: https://finhelp.io/glossary/investment-cost-basis/.
• For estate and step‑up discussions, see our “Step‑Up in Basis” page: https://finhelp.io/glossary/step-up-in-basis/.

Authoritative sources and further reading

• IRS — “Capital Gains and Losses” (Topic) and Form 8949 instructions: https://www.irs.gov/taxtopics/tc409 and https://www.irs.gov/forms-pubs/about-form-8949
• IRS Publication 551, “Basis of Assets”: https://www.irs.gov/publications/p551
• IRS Publication 527, “Residential Rental Property”: https://www.irs.gov/publications/p527
• Consumer Financial Protection Bureau — recordkeeping basics for consumers: https://www.consumerfinance.gov
• Investopedia — “Cost Basis” (overview): https://www.investopedia.com/terms/c/costbasis.asp

Professional disclaimer: This article is educational and does not constitute personalized tax or legal advice. For guidance tailored to your situation, consult a CPA, tax attorney, or qualified financial advisor.

If you want a ready-to-use spreadsheet template for tracking cost basis (columns and formulas), I can provide a downloadable example or a Google Sheets template you can adapt.