What is the definition of basis in tax terms?

Basis, in tax terms, refers to the amount of capital investment in property. It represents the original value of an asset for tax purposes and is crucial for determining gain or loss when the asset is sold or disposed of. Basis typically includes the purchase price of the property plus any associated costs, such as closing costs or improvements made, minus any depreciation deductions taken over time.

Understanding basis is important because it affects the taxable income from the sale of the asset. When an asset is sold, the gain or loss is calculated based on the difference between the selling price and the taxpayer’s basis in the property. This calculation highlights the significance of accurately determining basis as it ultimately influences the tax implications of a sale.

The other options, while related to property and finance, do not encapsulate the precise definition of basis. Fair market value pertains to the current market price of an asset rather than the initial investment, total sales price relates to the transaction price at sale, and depreciated value specifically refers to asset value reduction over time but does not represent the overall investment in the property.