Question

Which of the following is calculated by adding the initial cost of an investment property, plus the cost of subsequent improvements, minus the amount of any depreciation claimed as a tax deduction?

a) Net operating income
b) Gross rent multiplier
c) Cash-on-cash return
d) Adjusted basis

Answer 1

The calculation of initial investment cost plus improvements minus depreciation is known as the adjusted basis of a property. It is important for determining capital gains or losses and for tax purposes. To get adjusted basis, add purchase price and capital improvements cost, then subtract claimed depreciation.

Step-by-step explanation:

The calculation that adds the initial cost of an investment property, plus the cost of subsequent improvements, minus the amount of any depreciation claimed as a tax deduction is known as the adjusted basis. This figure is crucial in determining the capital gains or losses upon the sale of the property, and is also used for other tax-related calculations.

To calculate the adjusted basis, you start with the original purchase price of the property (initial cost) and add to it any expenses for capital improvements. Then, you subtract any depreciation that you have claimed for the property over the years.

Steps to Calculate Adjusted Basis:

1. Add the purchase price of the investment property (initial cost).
2. Add the cost of any capital improvements made to the property.
3. Subtract any depreciation deductions claimed on tax returns.

The resulting figure is the property's adjusted basis. It is different from net operating income, gross rent multiplier, and cash-on-cash return, which are other financial metrics used in real estate investment analysis.