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 basis of the property. The result of these adjustments to the basis is the adjusted basis. Table 14-1 Examples of Adjustments to Basis
Increases to Basis
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. Other items added to the basis of property include the cost of extending utility service lines to the property and legal fees, such as the cost of defending and perfecting title.
Add the cost of improvements to your basis in the property if they increase the value of the property, lengthen its life, or adapt it to a different use. For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway.
Assessments for local improvements.
Add assessments for improvements such as streets and sidewalks to the basis of the property assessed if they increase the value of the property. Do not deduct them as taxes. However, you can deduct as taxes assessments for maintenance, repair, or meeting interest charges on the improvements.
Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Add the assessment to your propertys basis. In this example, the assessment is a depreciable asset.
Decreases to Basis
The following items reduce the basis of your property.
- The section 179 deduction for the cost of qualifying property acquired for use in your trade or business.
- The deduction for clean-fuel vehicles and clean-fuel vehicle refueling property.
- Nontaxable corporate distributions (see chapter 9).
- Deductions previously allowed or allowable for amortization, depreciation, and depletion.
- Exclusion from income of subsidies for energy conservation measures (see Energy conservation subsidies in chapter 13).
- Credit for qualified electric vehicles.
- Gain from the sale of your home on which tax was postponed.
- Casualty and theft losses and insurance reimbursements.
- Certain canceled debt excluded from income.
- Rebates received from a manufacturer or seller.
- Gas-guzzler tax.
- Adoption tax benefits.
Casualties and thefts.
If you have a casualty or theft loss, decrease the basis of your property by any insurance proceeds or other reimbursement. Also decrease it by any deductible loss not covered by insurance. For information about figuring your casualty or theft loss, see chapter 27.
You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. To make this determination, compare the repaired property to the property before the casualty.
The amount you receive for granting an easement is generally considered to be from the sale of an interest in your real property. It reduces the basis of the affected part of the property. If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain.
If the recognized gain is on a capital asset, see chapter 17 for information about how to report it. If the recognized gain is on property used in a trade or business, see Publication 544 for information about how to report this gain.
Depreciation and section 179 deduction.
Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you selected.
For more information about depreciation and the section 179 deduction, see Publication 946.
Credit for qualified electric vehicles.
If you claim the credit for a qualified electric vehicle, you must reduce your basis in that vehicle by the lesser of the following amounts.
- 10% of the vehicles cost.
This basis reduction rule applies even if the credit allowed is less than the reduction amount. For more information on this credit, see chapter 12 in Publication 535
Deduction for clean-fuel vehicle and refueling property.
If you take the deduction for clean-fuel vehicles or clean-fuel vehicle refueling property, decrease the basis of the property by the deduction. For more information about these deductions, see chapter 12 in Publication 535.
Exclusion of subsidies for energy conservation measures.
You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit. Reduce the basis of the property for which you received the subsidy by the excluded amount. For more information about this subsidy, see chapter 13.
Gain from sale of home on which tax was postponed.
If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the amount of the postponed gain. For more information on the rules for the sale of a home, see Publication 523.
You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. You added an improvement to the duplex that cost $10,000. In February last year the duplex was damaged by fire. Up to that time you had been allowed depreciation of $23,000. You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. You deducted a casualty loss of $1,000 on your income tax return for last year. You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. You must use the duplexs adjusted basis after the restoration to determine depreciation for the rest of the propertys recovery period. Figure the adjusted basis of the duplex as follows:
|Original cost of duplex
|Addition to duplex
|Total cost of duplex
|Adjusted basis before casualty
|Deducted casualty loss
|Adjusted basis after casualty
|Add: Cost of restoring duplex
|Adjusted basis after restoration
Your basis in the land is its original cost of $5,000.
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