In tax terms, what does "basis" refer to?

"Basis" in tax terms refers to the amount of investment that a taxpayer has in a property for tax purposes. This concept is critical because it establishes the starting point for measuring gain or loss when the property is sold. Specifically, the basis includes the purchase price of the property as well as any additional costs associated with acquiring it, such as closing costs and certain improvements made to the property.

Understanding basis is essential for tax calculations, particularly in determining capital gains tax. When the property is sold, the taxpayer subtracts the adjusted basis from the sale price to figure out the taxable gain. Thus, maintaining accurate records of the basis is vital for effective tax planning.

Other options may seem related but do not accurately capture the definition of basis. The total income earned from a property reflects the revenue generated, while depreciation value refers specifically to how much value has been deducted over time, impacting the basis but not defining it. The final sale price, though important for determining gains, is not related to the initial investment amount that establishes the basis. Therefore, the correct choice clearly encapsulates the essential concept of basis in tax terminology.