What does "adjusted basis" refer to in property terms?

Adjusted basis refers to the original basis or cost of a property, adjusted for various factors that can increase or decrease its value for tax purposes. These adjustments typically include depreciation taken on the property and any improvements made to it, which enhance its value.

When an individual or business sells a property, the adjusted basis is important for determining gain or loss on the sale. A higher adjusted basis may indicate that more investment was made into the property, while a lower basis reflects depreciation or other reductions in value over time. This understanding is essential for accurately calculating taxable income and the gain or loss upon disposition of the asset.

In contrast, the total amount paid for the property without accounting for these adjustments does not give a true picture of the property's value for tax purposes. Interest expenses or selling costs also do not factor into the adjusted basis calculation because they do not pertain to the acquisition or improvement of the property itself. The market value of the property at sale is separate from the adjusted basis, which is strictly a tax calculation based on historical costs and adjustments rather than current market conditions.