California Real Estate Practice Exam

For federal income tax purposes, a taxpayer could increase the basis of their residence with which of the following?

1. Accrued depreciation

2. Addition of a patio

3. None of the above, for a personal residence basis cannot be adjusted for any reason

4. Property taxes

The correct answer is: Accrued depreciation

The correct answer is the addition of a patio. When it comes to federal income tax purposes, the basis of a residence can indeed be increased through certain improvements. Enhancements made to a property, like constructing a patio, are capital improvements that substantially add to the value or adapt it for new uses. This type of spending can be added to the property's basis, which, when sold, may reduce the capital gains tax liability on any appreciation of the property. Accrued depreciation is typically associated with rental or business properties rather than personal residences. Property taxes are considered an expense and do not increase the basis of the property. The basis of a personal residence remains mostly unchanged by the standard homeowner expenses and periodic taxes paid. Thus, the addition of a patio is a clear example of an improvement that can enhance the value of the property and adjust the basis accordingly.