Oregon Tax Consultants Practice Exam

Which item would be a decrease to basis?

1. Sidewalk installations

2. Capitol improvements

3. Depreciation

4. Replacing a roof

The correct answer is: Depreciation

A decrease to basis refers to adjustments that lower the original cost basis of an asset. In tax terminology, this concept helps calculate gain or loss upon the sale of property. Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life. When an asset is depreciated, its basis decreases annually, reflecting the wear and tear or usage of that asset. In contrast, the other listed items—sidewalk installations, capital improvements, and replacing a roof—would typically represent increases or enhancements to the property's value or utility. Sidewalk installations and capital improvements generally add value to the property or extend its useful life, thus increasing basis. Replacing a roof may be considered a necessary maintenance expense or an improvement, but it does not directly reduce the basis; rather, it may increase it by enhancing the property's value or prolonging its life. Hence, depreciation is the only item that straightforwardly results in a decrease to basis, making it the correct choice.