Oregon Tax Consultants Practice Exam

How should the cost of modification of a building be handled if requirements are met?

1. Add them to your basis

2. Deduct them as immediate expenses

3. Report them as capital gains

4. Capitalize them over time

The correct answer is: Add them to your basis

When dealing with the modification of a building, the cost must be handled with consideration of whether it adds value, prolongs the useful life of the property, or adapts it for a different use. If the modifications meet necessary requirements, the appropriate treatment is to add them to your basis. This means that the costs of these improvements increase the property's tax basis, which ultimately affects capital gains calculations when the property is sold. Capital additions typically include significant renovations or upgrades that enhance the building's functionality or lifespan, allowing for a more accurate reflection of the property's value. In contrast, immediate expense deductions are typically reserved for repairs or maintenance that merely sustain the property without adding substantial value. Reporting as capital gains is not applicable to expenses but rather relates to income generated from the property. Capitalizing costs over time is more appropriate for certain expenses but generally doesn’t apply if the modifications directly enhance the value and usability of the property. Thus, adding modification costs to the basis provides a complete and clear indication of the total investment made in the property.