Oregon Tax Consultants Practice Exam

Which of the following costs can increase the basis of a property?

1. Normal repair costs

2. Legal fees for property acquisition

3. Depreciation on the property

4. Routine maintenance expenses

The correct answer is: Legal fees for property acquisition

The correct choice is legal fees for property acquisition because these fees are considered part of the costs directly associated with acquiring the property. When determining the basis of a property, which is necessary for calculating capital gains or losses upon sale, the basis includes not just the purchase price but also other related acquisition costs. This can encompass closing costs, legal fees, and other transactional expenses that provide value to the property. Normal repair costs and routine maintenance expenses are typically viewed as ordinary expenses related to the upkeep of the property rather than improvements. These costs do not increase the basis since they do not enhance the property's value or prolong its useful life; instead, they are usually expensed in the year incurred without affecting the capital structure of the property. Depreciation represents the allocation of the cost of the property over its useful life and is a deduction against income for tax purposes rather than an increase in the property's basis. While depreciation reduces the taxable income generated by the property, it does not contribute to the property’s basis for capital gains calculation. Thus, legal fees for property acquisition correctly represent costs that increase the basis, reflecting their nature as part of the investment into the property itself.