What is the formula to calculate adjusted basis?

The formula for calculating adjusted basis takes into account the original purchase price of an asset and adds any costs associated with acquiring the property and any capital improvements made to it.

The purchase price is the initial amount paid for the property. Costs to buy the property can include various expenses such as closing costs, title fees, and real estate agent commissions that are incurred when acquiring the property. Capital improvements refer to enhancements or upgrades made to the property that increase its value, such as adding a room, updating the roof, or improving the landscaping.

This comprehensive approach ensures that the adjusted basis reflects not just the initial cost but also the total investment made in the property, allowing for accurate calculations regarding potential capital gains or losses when the property is sold.

Other options may omit essential components such as capital improvements or incorrectly include capital gains, which don't factor into the adjusted basis calculation. By including both the costs associated with purchasing and the costs of improving the property, the correct answer provides a complete picture for determining the adjusted basis.