Final answer:
To calculate a property's adjusted basis, start with the initial purchase price and add the cost of any improvements. The correct deduction from the basis is depreciation, which accounts for the property's decline in value over time.
Step-by-step explanation:
To derive a property's adjusted basis, the calculation starts with the property's original purchase price, which is known as the basis. Improvements made to the property are added to the basis, as these increase the value of the property. However, certain deductions are then made to arrive at the adjusted basis. Among the choices provided, depreciation is the correct deduction to make from the basis. Depreciation represents the property's decline in value over time due to use and wear and tear. Neither mortgage interest, operating expenses, nor property taxes are deducted to calculate the adjusted basis, though they might have separate tax implications. For example, mortgage interest can often be deducted on the owner's tax return, and property taxes are typically deductible as well. Nonetheless, these are not factored into the calculation of a property's adjusted basis.