Paralegal Advanced Competency Exam (PACE) Practice Exam

What is adjusted to determine the basis of real property?

1. The tax value of the property

2. The original purchase price of the property

3. The estimated market value at sale

4. The annual rental income

The correct answer is: The original purchase price of the property

The basis of real property is determined by adjusting the original purchase price of the property. This original purchase price includes the amount paid for the property at the time of acquisition and can also encompass various adjustments for improvements made to the property, certain closing costs, and any other associated acquisition expenses that might increase the property's value. This concept is crucial for various financial evaluations, including calculating depreciation, determining capital gains taxation upon sale, and assessing property value for estate planning. Through this process, the original purchase price serves as a foundational figure that is modified to reflect the current value and status of the property. In contrast, the tax value of the property, estimated market value at sale, and annual rental income don't serve as the basis for adjustments directly; instead, they provide insights or estimates that may influence property valuation and tax considerations but do not affect the original basis calculation in the same manner.