California Real Estate Practice Exam

A homeowner wants to increase the tax basis of their property. Which of the following would not be acceptable?

1. Accrued depreciation

2. Adding a new roof

3. Installing a new swimming pool

4. None of the above

The correct answer is: Accrued depreciation

Increasing the tax basis of a property involves adding to the investment amount made in that property, which can potentially reduce capital gains tax when the property is sold. A homeowner can increase their tax basis through capital improvements, which are enhancements to the property that provide added value or extend its life. Accrued depreciation, however, refers to the loss in value of the property over time due to wear and tear or obsolescence. This is an accounting concept that decreases the property's overall value on the balance sheet, rather than increasing it. Therefore, utilizing accrued depreciation does not serve to increase the tax basis of the property, as it effectively reduces the value by accounting for the reduction over time. On the other hand, making improvements like adding a new roof or installing a swimming pool directly contributes to the value of the property and is categorized as a capital improvement, both of which would increase the tax basis. These enhancements extend the functionality and potentially the marketability of the property, allowing the tax basis to reflect the current value more accurately. Understanding these principles is essential for homeowners looking to manage their real estate investments effectively.