Adjusted basis refers to the original cost basis of a property, adjusted for various factors such as depreciation, capital improvements, and other expenses incurred by the owner. The adjusted basis is used to calculate the gain or loss on the sale of a property, which is a key factor in determining the tax liability of the property owner.
In a 1031 exchange, the adjusted basis of the property being relinquished is carried over to the replacement property, which means that any deferred taxes on the gain from the relinquished property are also deferred until the replacement property is sold. This can provide significant tax benefits to property owners who want to exchange their property for a similar property without incurring a tax liability.