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Define Adjusted Basis in Real Estate

Adjusted Basis: 

"Adjusted Basis" is a term in real estate that means the original cost of a property, like a house, plus any improvements made or minus any losses, like damages. This number helps you figure out how much profit or loss you'll have when you sell the property.


Imagine you bought a house for $200,000. You spent $50,000 on remodeling the kitchen and fixing the roof. Your Adjusted Basis would be the original cost ($200,000) plus the improvements ($50,000), which equals $250,000.

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A few additional points to keep in mind about Adjusted Basis:

Depreciation: In addition to improvements or losses, the adjusted basis of a property may also be affected by depreciation. Depreciation accounts for the wear and tear or decrease in value of certain property components over time. It is particularly relevant for investment properties or properties used for business purposes.

Tax Deductions: The adjusted basis of a property is crucial for calculating tax deductions related to homeownership or investment properties. For instance, if you use a portion of your home for business purposes, you may be able to deduct depreciation expenses based on the adjusted basis.

Losses and Casualties: If your property suffers damage or destruction due to events like fires, floods, or natural disasters, the adjusted basis helps determine the loss you can claim for insurance or tax purposes. Subtracting the adjusted basis from any insurance reimbursement or deduction can determine the extent of the loss.

Keeping Track of Records: It's important to maintain accurate records of the costs associated with acquiring, improving, and maintaining your property. This includes purchase documents, receipts for improvements, and any relevant insurance claims or reimbursements. These records will be crucial in determining the adjusted basis and potential gains or losses when you sell the property.

Consult a Professional: Calculating the adjusted basis for a property can become complex, especially when dealing with multiple improvements, repairs, or unique circumstances. It's advisable to consult a tax professional or real estate expert to ensure accurate calculations and compliance with tax regulations.

Remember, the adjusted basis is a significant factor when it comes to determining the financial implications of owning and selling property. Understanding how it is calculated and the factors that affect it will help you make informed decisions regarding your real estate investments.
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In the land of homes and sales, a term you'll want to know,
Adjusted Basis is its name, for property value, it does show.

The original cost you see, plus improvements made with care,
Minus losses, if there be, the Adjusted Basis we declare.

A house you bought one day, two hundred thousand as a start,
You spent on renovations, fifty thousand more, you're smart.

Adjusted Basis now we find, two fifty thousand, quite refined,
A number that will help you see, the profit made eventually.

So when you study real estate, and terms you need to learn,
Remember Adjusted Basis, for the value you will earn!

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