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Two part question...what is a cost basis and how can it be used to help make investment decisions? I hear cost basis thrown around a lot and I’m not sure what it means.

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Cost basis is simply a calculation of what you paid for an investment at the time of purchase. It is generally used to determine how much profit you have (or would) make if you sold that investment at the current value. It is mostly used to calculate how much you owe in taxes on your investment profits.

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Suppose you bought a house for $300k. Then you put in $20k of furniture and $50k of renovations. By the time you’re ready to sell, the CPI has gone up by 5%. And maybe the house itself has deteriorated somewhat by then.

The question is: what selling price represents ‘breakeven’ to you? Maybe the carpets don’t count, the new garage does, and CPI isn’t reflective of house price movements. Picking your buy-price of $300k is probably too simplistic.

Answering that question gives you the “cost basis”. You can then use that number to determine what profit would be reasonable, or what loss you’d be willing to wear, when you look at offers to buy your house.

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