How is "adjusted basis" defined in property investment?

The definition of "adjusted basis" in property investment is the original cost of a property plus any improvements made, minus depreciation taken. This concept is essential for determining the tax implications when a property is sold.

When an investor purchases a property, they start with an original cost, which includes the purchase price and any additional costs directly associated with that purchase, such as closing costs. As the investor improves the property with renovations or other enhancements, these costs increase the basis. However, any depreciation taken over the years needs to be subtracted from this total. Depreciation reflects the reduction in the value of the property due to wear and tear or obsolescence, and it is a tax deduction that investors can utilize to reduce taxable income.

The adjusted basis is critical when calculating gain or loss on the property during a sale, as it provides a more accurate financial representation of the investment's current value. Understanding this concept helps investors evaluate their return on investment, tax obligations, and financial strategies effectively.