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

What does the recoverable basis refer to in investment tax laws?

1. Overall property value

2. Cost of land acquisition

3. Cost of improvements only

4. Annual operating expenses

The correct answer is: Cost of improvements only

The recoverable basis in investment tax laws specifically refers to the cost of improvements made to a property, which can be recovered over time through depreciation for tax purposes. This includes expenditures that enhance the value of the property or extend its useful life, such as renovations, upgrades, and expansions. By allowing property owners to recover these costs through depreciation deductions, the tax code aims to provide incentives for property improvement and investment. Options that focus on overall property value, cost of land acquisition, or annual operating expenses do not qualify as recoverable basis in the same context. Overall property value includes both land and improvements and does not separate out the specific costs associated with improvements. Meanwhile, land acquisition costs are not depreciable since land does not wear out or have a useful life that can be shortened. Annual operating expenses are also not recoverable in the context of basis calculations but are instead treated as operating costs that affect cash flow. Thus, the correct understanding of recoverable basis relates directly to the cost of improvements.