Adjusted basis refers to the total cost of acquiring a property less any cost recovery (depreciation). So,
Adjusted Basis = Purchase Price + Acquisition Costs + Capital Improvements – Cost Recovery.
Example, You purchased a property for $80,000; paid 1.5% mortgage origination fee; Put a new roof for 5,000; and, kept the place for 10 years. The land is, say, 30% of the purchase price and 70% of the price is for the improvement.
Annual cost recovery = (80,000X70%)/27.5 years = $2,036
Note: there are other cost recoveries that are taken over different number years. For example, the cost of adding a fence is depreciated over 5 years. Please consult your CPA.
Adjusted Basis = 80,000+1,200+5,000-(2,036X10) = $65,840