What is meant by the term adjusted basis in real estate?

Adjusted basis refers to the original cost of a property, adjusted for various factors over time, which helps determine the asset's value for tax purposes, especially when calculating capital gains or losses upon sale. This concept includes the initial purchase price of the property and any capital expenditures that enhance its value, such as major renovations or improvements. Additionally, it accounts for depreciation taken on the property, which reduces the basis over time.

By considering both the capital investments made in the property and the depreciation claimed, the adjusted basis provides a more accurate representation of the property's value as it pertains to financial and tax calculations. This measurement is crucial for homeowners and investors alike as it affects the potential capital gains tax they may owe when selling the property. The formula captures the true value of the investment over time, allowing for a clearer understanding of the financial implications of real estate transactions.