Oregon Tax Consultants Practice Exam

Which of the following is an example of an increase to basis?

1. Section 179 Deductions

2. Insurance reimbursements

3. Legal Fees related to property improvement

4. Nontaxable corporate distributions

The correct answer is: Legal Fees related to property improvement

An increase to basis refers to any adjustment that raises the value of an asset for tax purposes. This typically occurs when investments or improvements are made to the property that enhance its value or extend its useful life. In this context, legal fees related to property improvement are indeed a legitimate example of an increase to basis. This is because these fees directly relate to enhancing the property, helping to create a more favorable tax situation when the property is sold or otherwise disposed of. When legal fees are incurred to improve a property—such as obtaining permits, compliance with zoning laws, or contractual agreements that increase the asset’s value—they can be capitalized as part of the asset's basis. This adjustment allows for a higher basis calculation, potentially reducing taxable gain when the property is sold. Other options reflect transactions or deductions that do not directly enhance the value of the asset itself. For instance, Section 179 deductions allow for immediate expensing of certain asset costs, which typically reduces basis rather than increasing it. Insurance reimbursements also generally do not contribute to basis; rather, they reduce it in cases of loss recovery. Nontaxable corporate distributions similarly do not increase an individual’s investment in the asset. Thus, the specific nature of legal fees tied to property improvements just