What happens to the basis when a property is improved?

When a property is improved, the basis of that property increases. This is because improvements enhance the value, usefulness, or extend the life of the property, and as such, they contribute to the overall investment made in the asset. For tax purposes, any capital expenditures incurred to improve a property are added to the property's basis, thereby increasing the amount that can be depreciated or recovered when the property is sold.

Improvements can include things like adding a new room, installing a new roof, or upgrading systems such as plumbing and electrical. Unlike regular maintenance or repairs, which merely maintain the property’s current condition without adding value, improvements add significant value or extend its lifespan, meriting an adjustment to the basis.

In contrast to the correct answer, a decrease in basis or a stable basis would not accurately reflect the financial reality of what happens when a property is improved. Understanding the impact of improvements on basis is essential for accurately calculating tax liabilities and gains/losses upon the sale of the property.