Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What does the adjusted basis signify in property investment?

1. Estimation of rental income

2. Book value of land alone

3. Source for capital gains calculation

4. Total initial cost of the property

The correct answer is: Source for capital gains calculation

The adjusted basis in property investment is significant as it represents the total amount of money invested in a property for tax purposes, which includes the purchase price plus acquisition costs, improvements, and some other expenses, minus any depreciation taken. This adjusted basis is used as the primary source for calculating capital gains when the property is sold. The difference between the adjusted basis and the selling price determines the capital gain or loss, which is crucial for tax reporting and planning. While one might consider other aspects related to property investment, those options do not focus on the fundamental purpose of adjusted basis in financial calculations during sale transactions. For example, the estimation of rental income pertains to ongoing revenue assessments rather than investment initial cost calculations. Similarly, the book value of land alone represents just a portion of the investment and does not reflect additional costs or improvements that contribute to the overall investment basis. Lastly, while the total initial cost of the property is part of what forms the adjusted basis, it does not include adjustments from depreciation or improvements that inform capital gains calculations. Hence, focusing solely on the adjusted basis serves as a critical metric for understanding gain or loss upon the sale of a property.