What is the adjusted basis of a property?

The adjusted basis of a property is determined by taking the original cost of the property and adding any improvements made to it, while also subtracting any depreciation that has been taken on the property over time. This concept is important in real estate as it helps to calculate capital gains when the property is sold, allowing for a clearer picture of the investment's profitability.

In essence, the adjusted basis reflects the true investment into the property, considering both enhancements and reductions in value due to depreciation. Improvements could include things like remodeling a kitchen or building an addition, which increase the overall value of the property. Depreciation accounts for the wear and tear or reduction in value of the property over time due to usage and age.

Other options do not encapsulate the full idea of adjusted basis. The sale price of the property does not account for improvements or depreciation. The market value represents what the property could be sold for at a given time but doesn’t factor in personal investment. The purchase price exclusive of taxes ignores the importance of improvements and depreciation, which are critical to determining adjusted basis.