Understanding the Difference Between Book Value and Purchase Value of a Fixed Asset
Written By Liz Gillian, Accounting Manager at BEC CFO & CPA
As a real estate owner, understanding the financial aspects of your properties is crucial for making informed decisions, especially when it comes to taxes, financial reporting, and property sales. One of the key concepts to grasp is the difference between book value and purchase value of a fixed asset. These terms impact financial statements, tax calculations, and the potential gains or losses when selling a property.
In this article, we will break down:
What purchase value means
What book value represents
Why the difference matters in real estate transactions
What is Purchase Value?
The purchase value (also referred to as the original cost or historical cost) of a fixed asset is the amount paid to acquire the asset. This is the starting value recorded in financial statements.
For real estate, the purchase value typically includes:
✔ The property’s purchase price
✔ Closing costs (title fees, legal fees, etc.)
✔ Initial property improvements that add value
For example, if you purchased a building for $500,000 and spent $20,000 on closing costs and renovations, the purchase value would be:
500,000+20,000=520,000500,000 + 20,000 = 520,000500,000+20,000=520,000
This value remains constant unless adjustments are made for improvements or impairments.
What is Book Value?
The book value (also known as net book value or adjusted basis) of a fixed asset is the value recorded on financial statements after accounting for depreciation, amortization, and any impairments over time.
Formula for Book Value:
Book Value=Purchase Value+Capital Improvements−Accumulated Depreciation\text{Book Value} = \text{Purchase Value} + \text{Capital Improvements} - \text{Accumulated Depreciation}Book Value=Purchase Value+Capital Improvements−Accumulated Depreciation
Since depreciation reduces the book value over time, the book value of a real estate asset is usually lower than its purchase value (unless significant improvements are made).
Example: Depreciation’s Effect on Book Value
Let’s say you purchased a commercial property for $500,000 and have been claiming $10,000 per year in depreciation for 10 years.
Book Value=500,000−(10,000×10)=400,000\text{Book Value} = 500,000 - (10,000 \times 10) = 400,000Book Value=500,000−(10,000×10)=400,000
So, after 10 years, the book value of the property is $400,000, even though the original purchase price was $500,000.
Key Differences Between Book Value and Purchase Value
Why Does the Difference Matter for Real Estate Owners?
1. Impact on Selling a Property
When you sell a property, the difference between the book value and the sale price determines whether you have a gain or loss for tax purposes.
If the sale price is higher than the book value → You have a taxable gain.
If the sale price is lower than the book value → You may have a tax-deductible loss.
Example:
Purchase Value: $500,000
Book Value after depreciation: $400,000
Sale Price: $600,000
Taxable Gain: $600,000 - $400,000 = $200,000
2. Depreciation Recapture Tax
Since depreciation lowers the book value, it can increase taxable gains upon sale due to depreciation recapture tax (which is taxed at up to 25%).
3. Financial Reporting and Loans
If you need financing, banks and lenders may look at the book value of your assets to determine the financial strength of your real estate holdings.
Conclusion
Understanding the difference between purchase value and book value is crucial in real estate. While purchase value represents the original cost of the property, book value reflects its adjusted worth after depreciation. This difference directly affects your taxes, financial statements, and the gain or loss when selling a property.
For personalized tax and financial planning strategies, our accounting firm can help you navigate depreciation, property sales, and tax-efficient investment decisions.