How is the adjusted basis of a property defined?

The adjusted basis of a property is defined as the original cost of the property plus any capital improvements made to it, minus any depreciation that has been taken. This concept is essential in calculating the gain or loss from the sale of the property.

When you purchase a property, the initial price you pay is the starting point for its basis. Over time, if you make improvements that enhance the value or extend the life of the property, these costs are added to the basis. Additionally, depreciation—which reflects the property’s decrease in value over time due to wear and tear or obsolescence—reduces the basis. This adjusted figure is then used to determine taxable income when the property is sold, as it establishes how much profit (or loss) was realized.

Understanding this calculation helps in real estate transactions, as it impacts not only tax implications but also investment strategies. The emphasis on capital improvements and depreciation distinctly sets this approach apart from merely considering the purchase price or market value at sale, which are not comprehensive measures of adjusted basis.