What does the adjusted basis of a property encompass?

The adjusted basis of a property is a crucial concept in real estate and taxation, as it represents the original cost of the property adjusted for various factors. The correct answer emphasizes that the adjusted basis includes the original purchase price along with the value of any improvements made to the property.

When calculating adjusted basis, the original cost of acquisition is the starting point; however, any capital improvements—such as renovations or upgrades that increase the property's value—are added to this amount. These improvements can be crucial because they can enhance the overall value of the property and influence potential capital gains tax calculations when the property is sold.

It's important to differentiate between improvements (which increase value) and repairs (which typically do not affect the basis). Thus, the adjusted basis accurately reflects the total investment made in the property, providing a comprehensive view of what the property is truly worth in terms of investment for tax purposes.