Real Estate Appraisal Practice Exam

The term "adjusted basis" in real estate specifically refers to the original cost of the property, which is then modified by adding any improvements made to the property and subtracting any depreciation that has been taken during the ownership period. This measure is crucial for determining the property's tax implications, particularly when it is sold.

When improvements are made to a property, such as renovations or upgrades, these costs are added to the original purchase price, thus increasing the adjusted basis. On the other hand, depreciation, which is a deduction that allows property owners to recover the cost of wear and tear over time, decreases the adjusted basis because it reflects that the property has lost value in an accounting sense.

This adjusted basis is essential for tax calculations because it is used to determine the capital gains tax that may be owed when the property is sold. The gain or loss on the sale is calculated as the difference between the selling price and the adjusted basis.

The other choices do not define adjusted basis accurately. The sale price minus closing costs addresses net proceeds from a sale, current market value indicates what the property is worth at a given time, and total costs incurred during ownership includes expenses unrelated to the asset's value for tax purposes.