What does the term "adjusted basis" refer to in real estate?

The term "adjusted basis" in real estate specifically refers to the original cost of a property, taking into account any improvements made to it and subtracting any depreciation taken over time. This concept is crucial for determining the profit or loss on the sale of a property.

When real estate is sold, the adjusted basis is used to calculate the capital gains that will be taxed. If a property has undergone improvements, such as renovations or upgrades, these costs are added to the original purchase price to reflect a higher basis. Conversely, depreciation, which is a tax deduction that reflects the reduction in the value of the property over time due to wear and tear, reduces the basis. The adjusted basis thus provides a more accurate financial picture of the investment in the property, ensuring that the true economic profit or loss can be calculated when the property is sold.

This understanding is essential for real estate professionals to help clients accurately evaluate their investments and understand the potential tax implications of a sale.