Adjusted Basis

Adjusted basis is a property's cost basis increased by capital improvements and reduced by depreciation taken. It is the figure a sale price is measured against to find the taxable gain. Adjusted basis falls every year a rental is depreciated, even while NOI and market value rise.

The default house starts with a $500,000 basis. After ten years of about $14,545 in annual depreciation, the adjusted basis is roughly $354,500, before counting any improvements. A $20,000 kitchen remodel in that time would raise it to about $374,500.

Sell at $500,000 after those ten years with no improvements, and the gain is about $145,500 even though the price never changed. That entire gain comes from depreciation, so it would be taxed as recapture. NOI plays no part in the calculation.