Paralegal Advanced Competency Exam (PACE) Practice Exam

What is meant by "adjusted basis" in real property?

1. The initial purchase price of the property

2. The property's value minus depreciation plus improvements

3. The assessed value of the property at tax time

4. The market value at the time of sale

The correct answer is: The property's value minus depreciation plus improvements

Adjusted basis in real property refers to the property's value with specific modifications, including the initial purchase price adjusted for various factors. The concept involves taking into account the original cost of the property and then modifying it based on depreciation and any improvements made to that property. Depreciation reflects the decrease in value of the property over time due to wear and tear, while improvements signify any enhancements that increase the property's value, such as renovations or extensions. By subtracting the accumulated depreciation from the purchase price and adding in the cost of improvements, you arrive at the adjusted basis. This figure is crucial for calculating capital gains or losses upon sale, as it provides a clearer picture of the property’s true value as it stands at the time of a transaction. The other options do not accurately describe adjusted basis. The initial purchase price alone does not account for important modifications like depreciation or improvements. The assessed value at tax time is for taxation purposes and does not necessarily reflect the true economic value for capital gains calculations. Market value at the time of sale serves a different function, as it refers to what the property could sell for in the current market rather than a historical cost basis adjusted for specific factors.