What is the basis of property received as a gift?

To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value (FMV) at the time it was given to you and whether any gift tax was paid.

If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or loss when you dispose of the property. Your basis for figuring gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the property. Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property.

If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.

If the FMV is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift. See Gifts received before 1977 in Publication 551, Basis of Assets. Also, for figuring gain or loss, you must increase or decrease your basis by any required adjustments to basis while you held the property.

For more information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes.

I have investment property. Can you explain the term basis of assets?

Basis is your investment in property for tax purposes. The difference between the selling price of your assets and your basis determines whether there is a taxable gain or loss on the disposition of your property. You need to determine your basis to figure allowable depreciation deductions as well. Your original basis is usually your cost to acquire the asset. Your adjusted basis (which is the basis you use to determine gain or loss or depreciation amounts) is the result of increasing or decreasing your original basis according to certain events.

Increases to basis include but are not limited to:

. The cost of improvements having a useful life of more than a year

. Assessments for local improvements

. Sales tax that is not deducted

. The cost of extending utilities lines to your property

. Legal fees such as the cost of defending or perfecting title

. Zoning costs

Decreases to basis include but are not limited to:

. Depreciation amortization and depletion deductions

. Nontaxable corporate distributions

. Insurance reimbursements for casualty and theft losses

. Easements

. Rebates from the manufacturer or seller

Additional information on basis can be found in Publication 551, Basis of Assets, or Tax Topic 703, Basis of Assets.

How do I figure the cost basis of stock that has split, giving me more of the same stock, so I can figure my capital gain (or loss) on the sale of the stock?

When the old stock and the new stock are identical the basis of the old shares must be allocated to the old and new shares. Thus, you generally divide the adjusted basis of the old stock by the number of shares of old and new stock. The result is your new basis per share of stock. If the old shares were purchased in separate lots for differing amounts of money, the adjusted basis of the old stock must be allocated between the old and new stock on a lot by lot basis.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital Gains and Losses

How do I figure the cost basis when the stocks I'm selling were purchased at various times and at different prices?

If you can identify which shares of stock you sold, your basis is what you paid for the shares sold (plus sales commissions). If you sell a block of the same kind of stock, you can report all the shares sold at the same time as one sale, writing VARIOUS in the "date acquired" column of Form 1040, Schedule D (PDF). However, what you enter into the "cost or other basis" column is the total of all the acquisition costs of the shares sold.

If you cannot adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is the basis of the shares you acquired first (first-in first-out). Except for certain mutual fund shares, you cannot use the average price per share to figure gain or loss on the sale of stock.

For more information, refer to Publication 550, Investment Income and Expenses.

References:

• Publication 552, Recordkeeping for Individuals
• Tax Topic 409, Capital Gains and Losses

How do I compute the basis for stock I sold, when I received the stock over several years through a dividend reinvestment plan?

The basis of the stock you sold is the cost of the shares plus any adjustments, such as sales commissions. If you have not kept detailed records of your dividend reinvestments, you may be able to reconstruct those records with the help of public records from sources such as the media, your broker, or the company that issued the dividends.

If you cannot specifically identify which shares were sold, you must use the first-in first-out rule. This means that you deem that you sold the oldest shares first, then the next oldest, until you have accounted for the number of shares in the sale. In order to establish the basis of these shares, you need to have kept adequate documentation of all your purchases, including those that were made through the dividend reinvestment plan. You may not use an average cost basis. Only mutual fund shares may have an average cost basis.

Refer to Publication 550, Investment Income and Expenses, and Publication 551, Basis of Assets.

How do return of principal payments affect my cost basis when I sell mutual funds?

A return of principal (or return of capital) reduces your basis in your mutual fund shares. Unlike a dividend or a capital gain distribution, a return of capital is a return of part of your investment (cost). However, basis cannot be reduced below zero. Once your basis reaches zero, any return of principal is capital gain and must be reported on Form 1040 Schedule D (PDF), Capital Gains and Losses.

References:

• Publication 564, Mutual Fund Distributions

I own stock which became worthless last year. Can I take a bad debt deduction on my tax return?

If you own securities, including stocks, and they become totally worthless, you can take a deduction for a loss, but not for a bad debt.

The worthless securities are treated as though they were capital assets sold on the last day of the tax year. Report worthless securities on Form 1040, Schedule D (PDF), in Part 1 or 2 depending on whether you held the stock short term or long term, and write "Worthless" in the applicable column of Form 1040, Schedule D (PDF), Capital Gains and Losses. For additional information, refer to Chapter 4 of Publication 550, Investment Income and Expenses (Including Capital Gains and Losses) and Publication 552, Recordkeeping for Individuals. For more information on bad debts, refer to Tax Topic 453, Bad Debt Deduction.

I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house, the basis won't be affected?

If you qualify to deduct expenses for the business use of your home, you can claim depreciation for the part of your home that is a home office. Generally, the part of your home that is a home office is depreciated over a recovery period of 39 years using the straight line method of depreciation and a mid-month convention. If you do not claim depreciation on that part of your home that is a home office, you are still required to reduce the basis of your home for the allowable depreciation of that part of your home that is a home office when reporting the sale of your home. For more information, refer to Publication 587, Business Use of Your Home.

References:

• Publication 946, How to Depreciate Property
• Publication 544, Sales and Other Dispositions of Assets
• Publication 587, Business Use of Your Home