What does the term 'basis' refer to in tax terms?

In tax terminology, the term 'basis' refers to the taxpayer's investment in property. This concept is crucial because it represents the amount of money or value that a taxpayer has invested in an asset, which is used to determine gain or loss when the asset is sold. It includes the initial purchase price plus any additional costs that improve the property, minus any depreciation claimed.

Understanding the basis is key for calculating capital gains tax. When a property is sold, the gain is determined by subtracting the basis from the selling price. This makes it essential for individuals to keep accurate records of their investment and any adjustments made to the property over time.

The other options do not capture the specific financial aspect that 'basis' embodies in tax law. For example, the physical location of the property is irrelevant to the basis calculation, the tax owed relates to the profit from the sale rather than the investment itself, and depreciation is a method of reducing the basis but does not define what basis is. Thus, 'basis' specifically reflects the taxpayer's actual investment in the property.