What does the term "Capital Improvements" refer to in relation to Adjusted Basis?

The term "Capital Improvements" refers specifically to upgrades or enhancements made to a property that result in an increase in its overall value or extend its useful life. These improvements are significant modifications that enhance the property's capacity, efficiency, or attractiveness, such as adding a new roof, a room addition, or upgrading the electrical system.

In the context of Adjusted Basis, capital improvements are critical because they are added to the original cost basis of the property, thereby increasing the total amount that can be deducted when the property is sold. This adjusted basis is important for calculating capital gains tax since it affects the taxable portion of any profit realized from the sale of the asset.

In contrast, routine maintenance costs and expenditures that do not contribute to the property's value or extend its useful life are considered ordinary expenses, not capital improvements. These would not be added to the adjusted basis. Deductions related to sold assets or declines in asset value are separate concepts and do not pertain to the definition of capital improvements.