What is basis in terms of property?

Basis in terms of property refers to the amount of investment made in the property for tax purposes. This figure is crucial because it determines the gain or loss when the property is sold. The basis typically includes the purchase price of the property plus any additional costs incurred to acquire it, such as closing costs, legal fees, and any improvements made to the property.

Understanding basis is essential for calculating depreciation, determining gain or loss upon a sale, and for tax reporting. When a property is sold, the basis is subtracted from the selling price to determine the taxable gain; this indicates why having an accurate measure of basis is vital for effective tax planning and compliance.

While fair market value (the first choice) might indicate how much the property could sell for on the open market, it does not directly reflect the taxpayer’s investment in the property for tax purposes. The sale price received (the third choice) pertains to the transaction outcome but does not account for the original investment and associated costs. The original list price (the fourth choice) is simply what the seller initially asked for the property and does not necessarily correlate with the actual investment made. Thus, the correct response highlights the fundamental concept of basis as it relates specifically to taxation.