valuation

adjusted basis

Adjusted basis is the owner's original cost basis in a property, increased by the cost of capital improvements and certain purchase costs, and decreased by depreciation taken and certain other items such as casualty losses. It is used to calculate gain or loss when the property is sold: the amount realized minus adjusted basis equals the gain. Ordinary repairs and maintenance do not increase basis.

Exam tip: Capital improvements raise basis; repairs do not. For investment property, depreciation lowers basis and increases taxable gain.
Example: An owner buys for $200,000, adds a $30,000 addition, and takes $20,000 depreciation; adjusted basis is $210,000. Selling for $300,000 yields a $90,000 gain.

1. A father gives his son a rental property with an adjusted basis of $120,000 and a fair market value of $300,000. If the son later sells it for $320,000, what is the son's basis for computing gain?

Answer & explanation

Answer: D. Gifted property generally takes the donor's adjusted basis, a carryover basis, for computing gain. The fair market value at the date of the gift matters only for computing a loss when value is below the donor's basis. The stepped-up basis is for inherited property.

Related terms & state variants

1031 exchange basis capital gain straight-line depreciation

Sources

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Last verified: 2026-10-23