Table of Contents
Your basis is the amount of your investment in property for tax purposes. Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Also use basis to figure depreciation, amortization, depletion, and casualty losses. If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Only the basis allocated to the business or investment use of the property can be depreciated.
Your original basis in property is adjusted (increased or decreased) by certain events. For example, if you make improvements to the property, increase your basis. If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis.
Keep accurate records of all items that affect the basis of your assets. For information on keeping records, see chapter 1.Publication
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535 Business Expenses
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544 Sales and Other Dispositions of Assets
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551 Basis of Assets
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946 How To Depreciate Property
See chapter 16 for information about getting publications and forms.
The basis of property you buy is usually its cost. Cost is the amount you pay in cash, debt obligations, other property, or services. Your cost includes amounts you pay for sales tax, freight, installation, and testing. The basis of real estate and business assets will include other items. Basis generally does not include interest payments. However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535.
You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property.
Real property, also called real estate, is land and generally anything built on, growing on, or attached to land.
If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Some of these expenses are discussed next.
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Land,
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Labor and materials,
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Architect's fees,
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Building permit charges,
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Payments to contractors,
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Payments for rental equipment, and
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Inspection fees.
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Employee wages paid for the construction work, reduced by any employment credits allowed.
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Depreciation on equipment you own while it is used in the construction.
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Operating and maintenance costs for equipment used in the construction.
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Business supplies and materials used in the construction.
In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. To determine the basis of these assets or separate items, there must be an allocation of basis.
Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.
Generally, you are subject to the uniform capitalization rules if you do any of the following:
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Produce real or tangible personal property, or
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Acquire property for resale. However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less.
You produce property if you construct, build, install, manufacture, develop, improve, or create the property.
You are not subject to the uniform capitalization rules if the property is produced for personal use.In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals.
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A fruit, nut, or other crop-bearing tree;
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An ornamental tree;
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A vine;
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A bush;
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Sod; and
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The crop or yield of a plant that will have more than one crop or yield.
The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding.
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Any animal,
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Any plant with a preproductive period of 2 years or less, or
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Any costs of replanting certain plants lost or damaged due to casualty.
Example.
You grow trees that have a preproductive period of more than 2 years. The trees produce an annual crop. You are an individual and the uniform capitalization rules apply to your farming business. You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less.
Table 6-1. Plants With a Preproductive Period of More Than 2 Years
Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. | |||
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Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost of the property. The result is the adjusted basis of the property.
Increase the basis of any property by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year.
The following costs increase the basis of property.
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The cost of extending utility service lines to property.
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Legal fees, such as the cost of defending and perfecting title.
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Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements.
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Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Do not deduct these expenses as taxes. However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements.
If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. See chapter 7.
The following are some items that reduce the basis of property.
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Section 179 deduction.
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Deductions previously allowed or allowable for amortization, depreciation, and depletion.
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Alternative motor vehicle credit. See Form 8910.
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Alternative fuel vehicle refueling property credit. See Form 8911.
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Residential energy efficient property credits. See Form 5695.
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Investment credit (part or all) taken.
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Casualty and theft losses and insurance reimbursements.
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Payments you receive for granting an easement.
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Exclusion from income of subsidies for energy conservation measures.
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Certain canceled debt excluded from income.
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Rebates from a manufacturer or seller.
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Patronage dividends received from a cooperative association as a result of a purchase of property. See Patronage Dividends in chapter 3.
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Gas-guzzler tax. See Form 6197.
Some of these items are discussed next. For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551.
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Debt canceled in a bankruptcy case or when you are insolvent.
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Qualified farm debt.
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Qualified real property business debt (provided you are not a C corporation).
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Qualified principal residence indebtedness.
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Discharge of certain indebtedness of a qualified individual because of Midwestern disasters.
There are times when you cannot use cost as basis. In these situations, the fair market value or the adjusted basis of property may be used. Examples are discussed next.
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The FMV of the property on the date of the change, or
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Your adjusted basis on the date of the change.
Example.
George Smith is an accountant and also operates a farming business. George agreed to do some accounting work for his neighbor in exchange for a dairy cow. The accounting work and the cow are each worth $1,500. George must include $1,500 in income for his accounting services. George's basis in the cow is $1,500.
A taxable exchange is one in which the gain is taxable, or the loss is deductible. A taxable gain or deductible loss also is known as a recognized gain or loss. A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange.
If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property.
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Decrease the basis by the following amounts.
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Any loss you recognize on the involuntary conversion.
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Any money you receive that you do not spend on similar property.
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Increase the basis by the following amounts.
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Any gain you recognize on the involuntary conversion.
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Any cost of acquiring the replacement property.
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For more information about involuntary conversions, see chapter 11.
A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. A nontaxable gain or loss also is known as an unrecognized gain or loss. If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred.
The exchange of property for the same kind of property is the most common type of nontaxable exchange.
For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. There must also be an exchange of like-kind property. For more information, see Like-Kind Exchanges in chapter 8.
Example 1.
You traded a truck you used in your farming business for a new smaller truck to use in farming. The adjusted basis of the old truck was $10,000. The FMV of the new truck is $14,000. Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded.
Example 2.
You trade a machine (adjusted basis of $8,000) for another like-kind machine (FMV of $9,000). You use both machines in your farming business. The basis of the machine you receive is $8,000, the same as the machine traded.
A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments.
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Decrease the basis by the following amounts.
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Any money you receive.
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Any loss you recognize on the exchange.
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Increase the basis by the following amounts.
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Any additional costs you incur.
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Any gain you recognize on the exchange.
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If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange.
Example 1.
You trade farmland (basis of $10,000) for another tract of farmland (FMV of $11,000) and $3,000 cash. You realize a gain of $4,000. This is the FMV of the land received plus the cash minus the basis of the land you traded ($11,000 + $3,000 − $10,000). Include your gain in income (recognize gain) only to the extent of the cash received. Your basis in the land you received is figured as follows.
Basis of land traded | $10,000 |
Minus: Cash received (adjustment 1(a)) | − 3,000 |
$7,000 | |
Plus: Gain recognized (adjustment 2(b)) | + 3,000 |
Basis of land received | $10,000 |
Example 2.
You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. You realize a gain of $7,250. This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Your basis in the truck you received is figured as follows.
Adjusted basis of truck traded | $22,750 |
Minus: Cash received (adjustment 1(a)) | −10,000 |
$12,750 | |
Plus: Gain recognized (adjustment 2(b)) | + 7,250 |
Basis of truck received | $20,000 |
Example.
You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. You also received $1,000 cash and a truck that had an FMV of $3,000. The truck is unlike property. You realized a gain of $1,500. This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Your basis in the properties you received is figured as follows.
Adjusted basis of old tractor | $15,000 |
Minus: Cash received (adjustment 1(a)) | − 1,000 |
$14,000 | |
Plus: Gain recognized (adjustment 2(b)) | + 1,500 |
Total basis of properties received | $15,500 |
Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). This is the truck's FMV. The rest ($12,500) is the basis of the tractor.
If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange.
Example.
You used a tractor on your farm for 3 years. Its adjusted basis is $2,000 and its FMV is $4,000. You are interested in a new tractor, which sells for $15,500. Ordinarily, you would trade your old tractor for the new one and pay the dealer $11,500. Your basis for depreciating the new tractor would then be $13,500 ($11,500 + $2,000, the adjusted basis of your old tractor). However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $15,500 for the new tractor if he will pay you $4,000 for your old tractor. Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $11,500 ($15,500 − $4,000). Your basis for depreciating the new tractor is $13,500, the same as if you traded the old tractor.
To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. You also must know its FMV at the time it was given to you and any gift tax paid on it.
Net increase in value of the gift |
Amount of the gift |
Example.
In 2008, you received a gift of property from your mother that had an FMV of $50,000. Her adjusted basis was $20,000. The amount of the gift for gift tax purposes was $38,000 ($50,000 minus the $12,000 annual exclusion). She paid a gift tax of $7,760. Your basis, $26,130, is figured as follows.
Fair market value | $50,000 |
Minus: Adjusted basis | −20,000 |
Net increase in value | $30,000 |
Gift tax paid | $7,760 |
Multiplied by ($30,000 ÷ $38,000) | × .79 |
Gift tax due to net increase in value | $6,130 |
Adjusted basis of property to your mother | +20,000 |
Your basis in the property | $26,130 |
Note.
If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. However, your basis cannot exceed the FMV of the gift when it was given to you.
Example.
You received farmland as a gift from your parents when they retired from farming. At the time of the gift, the land had an FMV of $80,000. Your parents' adjusted basis was $100,000. After you received the land, no events occurred that would increase or decrease your basis.
If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss.
If the sales price is between $80,000 and $100,000, you have neither gain nor loss. For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain.
The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred.
The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer.
For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals.
Your basis in property you inherit from a decedent is generally one of the following:
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The FMV of the property at the date of the decedent's death. If a federal estate return is filed, you can use its appraised value.
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The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. For information on the alternate valuation, see the Instructions for Form 706.
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The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement.
If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.
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Contains your (and the estate's) name, address, and taxpayer identification number;
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Identifies the election as an election under section 1016(c) of the Internal Revenue Code;
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Specifies the property for which you are making the election; and
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Provides any additional information required by the Form 706-A instructions.
The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation.
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