Keyword: Cost Basis
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
3.4 Itemized Deductions/Standard Deductions: Interest, Investment, Money Transactions (Alimony, Bad Debts, Applicable Federal Interest Rate, Gambling, Legal Fees, Loans,
Where are fees and commissions for investments deducted?3.6 Itemized Deductions/Standard Deductions: 6. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)
If they are deductible, investment expenses other than investment interest
are taken as miscellaneous deductions on Form 1040, Schedule A (PDF), Itemized Deductions. These deductions must
be reduced by 2% of your adjusted gross income.
Commissions and fees for the acquisition or sale of an asset are added
to the basis of that asset and are not deductible. For example, acquisition
fees, sales commissions, and load charges paid in connection with the purchase
or selling of mutual fund shares are not deductible. They can usually be added
to the basis of the shares.
Fees for managing investments, such as custodial fees and management fees,
are deductible. Fees you pay a broker to collect taxable bond interest or
stock dividends are deductible. Fees that pass through to you from non-publicly
offered mutual funds, partnerships, or trusts are deductible. All of these
fees are subject to the 2% limit. For more information, refer to Publication 529, Miscellaneous Deductions; Publication 550, Investment
Income and Expenses; and Publication 564, Mutual Fund Distributions.
May I deduct my home improvements and repairs to my home?10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)
Home improvements add to the value of your home, prolong its useful life,
or adapt it to new uses. Home improvements costs are not deductible. However,
you add the cost of improvements to the basis of your property.
Examples of 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, putting on a new roof, or paving your driveway.
For a list of some other examples of improvements, refer to Publication 523, Selling
Repairs maintain your home in good condition. They are not currently deductible
nor do they add to your home's value or prolong its life. You do not add their
cost to the basis of your property.
Some examples of repairs include repainting your house inside or outside,
fixing your gutters or floors, repairing leaks or plastering and replacing
broken window panes.
Exception: The entire job is considered an improvement, however, if items
that would otherwise be considered repairs are done as part of an extensive
remodeling or restoration of your home. For more information, refer to Publication 523; Selling Your Home; and Publication 551, Basis
What is the basis of property received as a gift?
To figure the basis of property you get 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. 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. See Adjusted Basis in Publication 551, Basis of
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 or 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. Also, for figuring gain or loss, you must increase or decrease your
basis by any required adjustments to basis while you held the property. See
Adjusted Basis in Publication 551, Basis of Assets.
If you received a gift before 1977, increase your basis in the gift (the
donor's adjusted basis) by any gift tax paid on it. However, do not increase
your basis above the FMV of the gift at the time it was given to you.
If you received a gift after 1976, increase your basis by the part of the
gift tax paid on it that is due to the net increase in value of the gift.
Figure the increase to basis by multiplying the gift tax paid by the following
fraction. The numerator of the fraction is the net increase in value of the
gift and the denominator is the amount of the gift.
The net increase in value of the gift is the FMV of the gift less the donor's
adjusted basis. The amount of the gift is its value for gift tax purposes,
after reduction by any annual exclusion and any marital or charitable deduction
that applies to the gift. For more information on the gift tax, please see Publication 950, Introduction to Estate and Gift taxes.
For additional information on this subject see Gifts.
I have investment property. Can you explain the term basis
of assets?10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
Basis is your investment in property for tax purposes. Before you can figure
any gain or loss on a sale, exchange, or other disposition of property, or
figure allowable depreciation, you must determine the adjusted basis. Adjusted
basis is the result of increasing or decreasing your original basis according
to certain events. Your original basis is usually your cost to acquire the
Increases to basis include but are not limited to:
. Improvements having a useful life of more than a year
. Assessments for local improvements
. Sales tax
. The cost of extending utilities lines to the property
. Legal fees such as the cost of defending or perfecting title
. Zoning costs
Decreases to basis include but are not limited to:
. Nontaxable corporate distributions
. Casualty and theft losses
. 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.
I received stock as a gift from my grandparents. I am selling the
stock this year. How can I figure the basis of the gifted stock?
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, its fair market
value (FMV) at the time it was given to you, and the amount of any gift tax
paid on it.
If the FMV of the property was less than the donor's adjusted basis, your
basis for figuring gain on its sale or other disposition is the same as the
donor's adjusted basis plus or minus any required adjustment to basis during
the period you held the property. Your basis for figuring loss on its sale
or other disposition is its FMV at the time you received the gift plus or
minus any required adjustment to basis during the period you held the property.
If the FMV of the property was equal to or greater than the donor's adjusted
basis, your basis for figuring gain or loss on its sale or other disposition
is the same as 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.
For further complete information, refer to Publication 17, chapter
14, Basis of Property.
For additional information on this subject see Gifts.
When I sell shares of stock in a company that merged with the company
I originally invested in, do I use the basis and holding periods based on
the purchase of shares in the original company?
When you trade stock in one corporation for stock in another as part of
a merger or other qualifying reorganization, you may have a nontaxable exchange.
The basis of the stock you received is generally the same as the basis of
the old stock, increased by any gain recognized on the exchange (including
gain that is treated as a dividend) and decreased by the value of property
or money received.
You may receive cash or something of value instead of a fractional share
if the number of shares of new stock doesn't divide evenly into the number
of shares of the old stock. You treat this as a sale of the fractional share.
Your basis in the new stock is determined, in whole or in part, by your
basis in the old stock. Your holding period for the new stock will include
the holding period for the old stock, provided that the old stock was held
as a capital asset at the time of the exchange. For special basis rules relating
to incentive stock options and options granted under employee stock purchase
plan see Revenue Ruling 80-244, in IRS 1980-2 Cumulative Bulletin at
Refer to Publication 550, Investment Income and Expenses.
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.
When my stock split, the stock distributed to me was different than
my original shares. How do I figure the basis of the shares of the two different
kinds of stock?
Usually, the company issuing the new type of stock will send you a letter
explaining the tax consequences of the stock distribution, including how to
calculate the basis in the two different types of stock.
If you did not get such a letter or would like further assistance, call
IRS customer service at 1-800-829-1040 or refer to Publication 550, Investment
Income and Expense : Stock dividends under Basis of Investment Property .
How do I calculate the cost basis of the shares that have split
and are later sold from my employee stock purchase plan?
You need to determine what your basis is in the company stock on the date
of the split. The new shares assume part of your basis in the company stock
on that date. You must divide the adjusted basis in the old stock by the number
of shares of old and new stock. The result is your basis for each share of
For example, if you owned two shares of company stock with a basis in one
at $30 and the other $45, and the company declares a three for one stock split,
you now have six shares of stock. Three of the shares will have a basis of
$10, and three will have a basis of $15.
Because this is an Employee Stock Option Plan, you may have to report some
or all of the gain on the sale of this stock as ordinary income (wages). For
more information about employee stock option plans, see Publication 525 , Taxable and Nontaxable Income.
How do I prepare Schedule D for various stocks when records as to
the original purchase price have been lost?
The basis of stocks or bonds you own generally is the purchase price plus
the costs of purchase, such as commissions and recording or transfer fees.
If you acquired stock or bonds other than by purchase, your basis is usually
determined by fair market value or the previous owner's adjusted basis.
The basis of stock must be adjusted for certain events that occur after
purchase. For example, if you receive more stock from nontaxable stock dividends
or stock splits, you must reduce the basis of your original stock. You must
also reduce your basis when you receive nontaxable distributions, because
these are a return of capital.
The taxpayer has the burden of proving the basis of
property. Failure to prove cost results in a basis determined by the IRS or
even a basis of zero.
Except for certain mutual fund shares, you cannot use an average price
per share to figure the gain or loss on the sale of stock.
Refer to Stocks and Bonds under Basis
of Investment Property in chapter 4 of Publication 550, Investment
Income and Expenses .
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
Can the cost averaging method be used for calculating the cost basis
of stocks, or is it limited only to mutual fund shares?
The average basis method may be used only for mutual fund shares that were
purchased at various times for various prices if the shares are left in the
custody of a custodian or agent in an account maintained for the acquisition
or redemption of the shares.
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, then the next-to-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 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.
I know the basis of stock includes the cost of the original purchase,
but does it also include the value of stock acquired through a dividend reinvestment
Unless you sell all of your shares at one time, your total basis, which
includes both your original purchase and any purchases through a dividend
reinvestment, is not the figure used to report the sale of shares. If you
sell less than all of your shares at one time, you need to have kept adequate
documentation of all your purchases, including those that were through the
dividend reinvestment plan in order to establish the basis of the shares sold.
You may not use an average cost basis. Only mutual fund shares may have an
average cost basis.
When reporting the sale of shares of stocks, the basis for the calculation
of gain or loss is the actual cost (plus adjustments, such as sales commissions)
of those shares. If you cannot specifically identify which of your shares
were sold, you must use the first-in first-out rule.
For more information, refer to Publication 550, Investment Income
and Expenses, and Publication 551, Basis of Assets.
Do I have to pay taxes again on the stock acquired through a dividend
reinvestment plan when I sell them?
After you report the dividends as income, you have basis in the shares
acquired through dividend reinvestment. When you report the sale of the shares,
you will be taxed only on the amount that the sales proceeds (minus commissions)
exceed your cost basis (in this case, the amount of the dividends reinvested).
How do I determine the cost basis of stock bought through an employee
stock purchase plan (ESPP)?
Your starting basis is what you paid to buy the shares (option or exercise
price). This amount is increased by the compensation income amount, if any,
you must declare on your income tax return when the stock is sold. Sales commissions
can also increase the basis in your stock but will not affect the amount of
compensation that must be declared.
Under the employee stock purchase plan rules, if you had an option to purchase
the stock at a discount, the amount of compensation income realized when you
sell the stock depends on whether holding periods are met and whether you
purchased the stock at a discount.
To satisfy the holding period requirements, you must hold the stock for
at least one year after its transfer to you upon purchase and for two years
after the option is granted. If either of these holding periods are not met,
then you have not met the holding period requirements.
If the holding periods are met, the compensation income is the lesser of:
the amount by which the fair market value of the stock at the time you
are granted the option exceeds the option price, or
The amount by which the fair market value of the stock at the time you
sell it exceeds what you paid for it.
If they are not met, the compensation income is the amount by which the
fair market value of the stock, when vested, exceeds what you paid for it.
The compensation income should be included as wages on your Form W-2.
For more information, refer to Publication 525, Taxable and Non-Taxable
Are incentive stock options subject to alternative minimum tax,
and if so, how do I determine the basis for the stock?10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
A taxpayer generally must include in alternative minimum taxable income
the amount by which the price paid for stock received pursuant to the exercise
of an incentive stock option is exceeded by the stock's fair market value
at the time his rights the stock are freely transferable or are not subject
to a substantial risk of forfeiture.
Increase your alternative minimum tax basis by the amount of the adjustment.
Your basis for regular tax is not affected by the adjustment.
If a taxpayer acquires stock pursuant to the exercise of an incentive stock
option and disposes of the stock in a disqualifying disposition in the same
taxable year, the transaction is subject to regular tax, and the alternative
minimum tax does not apply. Refer to Internal Revenue Code 83, Internal Revenue
Code 56(b)(3), and Internal Revenue Code 422(c)(2). For more information,
Instructions for Form 6251, Alternative Minimum
Instructions for Form 6251, Alternative
Minimum Tax- Individuals
- Internal Revenue Code 83
- Internal Revenue Code 56(b)(3)
- Internal Revenue Code 422(c)(2)
How do I find out my cost basis for mutual funds if I do not have
all of the records?
You need to reconstruct your records the best that you can. Contact your
broker or the mutual fund company for assistance.
Another source of information is your prior year tax returns. If your mutual
fund has been reinvesting dividends, those reinvested dividends (which have
been used to purchase additional shares in the fund) should have been reported
as dividend income on your tax return each year. To compute your total basis,
add to the cost of the original shares purchased the amount of all dividends
automatically reinvested that were previously reported as income on your prior
tax returns and any shares you subsequently purchased.
You can usually also add acquisition fees and load charges you've paid
to your basis in your mutual fund shares. If you sell your shares and the
sales commission is not subtracted from the sales proceeds on Form 1099-B,
Broker and Barter Exchanges, you can add the commission to the basis of the
shares sold. If you receive a distribution that is identified as a return
of capital, you must reduce your total basis by that amount.
Refer to Keeping Track of Your Basis in Publication 564, Mutual
If I do not have the records showing each dividend reinvestment,
how do I calculate the basis of my shares in a mutual fund that I acquired
Unless you have acquired shares through gifts or inheritances, your basis
is what the shares cost you. Your mutual fund company can often provide you
with this information upon request. Another source of information is your
broker, if the fund was purchased through a broker. You cannot calculate your
basis in your mutual fund shares accurately without this information. You
can only claim the amount of basis that you can establish and substantiate
with records. You may lose a large part of your basis if you cannot establish
the amount of dividends that were reinvested. This is why keeping records
is so important.
Another source of information on reinvested dividends is your prior year
tax returns. If your mutual fund has been reinvesting dividends, those reinvested
dividends should have been reported as dividend income on your tax return
For more information, refer to Publication 564, Mutual Fund Distributions.
Do the dividends and/or capital gains I report affect my cost basis
of the individual mutual fund shares I own?
They would affect your total basis and total number of shares if they were
reinvested in the mutual fund. Add the reinvested dividends and capital gains
that you have reported as income on your tax return to your total basis. You
will also own additional shares in the fund because the dividends and capital
gains have been used to purchase shares. Keep good records. If you are going
to be using an average basis method to determine per-share basis on sales,
be sure and keep records of all your mutual fund activity until you no longer
own any shares in that fund.
There is a worksheet to help you keep track of your number of shares and
your basis in Publication 564, Mutual Fund Distributions.
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.
Do I have to specify to my broker which specific shares to sell
in order to use specific share identification to determine cost basis for
mutual funds? Do I need confirmation from my broker?
You are referring to meeting the requirement for "adequate identification."
If you can definitively identify the shares sold, you do not need to use the
adequate identification rules. You can use the adjusted basis of those particular
shares to figure your gain or loss.
The "adequate identification" rules allow you to control which shares are
considered sold, even though you may not control which shares are actually
sold. If you specify to your broker which shares you want sold prior to or
at the time of the sale and they confirm within a reasonable time in writing,
then you are considered to be able to "adequately identify" the shares sold,
even if the broker actually sells different shares. The confirmation by the
mutual fund must be given to you within a reasonable period of time and state
that you instructed the broker to sell particular shares.
If you cannot identify the specific shares and you do not want to use an
average basis, then you must use the first-in first-out method (FIFO). These
two methods are both cost basis methods. You may not use either cost basis
method if you have previously used an average basis method for that mutual
fund on a tax return. Refer to Publication 564, Mutual Fund Distributions.
I have used the FIFO method to determine the cost basis for a sale
of a portion of a mutual fund holding. Must I continue to use this method
for all future sales of this fund?
No. If you subsequently sell some shares in that mutual fund and can identify
the shares sold, you can switch to the specific share identification method.
Both of these methods are cost basis methods.
To switch to an average basis method, you must have acquired the shares
at various times and prices, and left the shares on deposit in an account
handled by a custodian or agent who acquires or redeems those shares. Once
you elect to use an average basis method, you must continue to use it for
all accounts in the same fund. However, you may use a different method for
shares in other funds, even those within the same family of funds.
Before using an average basis, be sure your records reflect the disposition
of the shares that were reported using the cost basis method (FIFO).
What affect does a stock split for a stock in my mutual fund have
on my cost basis when I am using an average basis method?
If a stock within your mutual fund splits, it has no affect on your basis
because the shares you own are shares in the mutual fund, not in the stock
How do I receive permission to change my cost basis calculation
to adopt an average basis method?10.4 Capital Gains, Losses/Sale of Home: Losses (Homes, Stocks, Other Property)
You do not need permission to elect an average basis method for a particular
mutual fund when you have used a cost basis previously to report the sale
of shares in the fund. If you meet the conditions to use an average basis,
then you just need to clearly indicate on the return for which you want the
election to be in effect that you are making the election. You also need to
indicate which average basis method you are using and that none of the shares
are gift shares. If there are gift shares in the account and the fair market
value of the shares at the time of the gift was not more than the donor's
basis, you must include a statement that the basis for gift shares when figuring
the average basis is the fair market value at the time of the gift.
If you have already reported the sale using a cost basis, you cannot make
this election unless you can do it on an amended return before the due date
of the tax return being amended.
However, you do need the consent of the IRS to use a cost basis or to change
your average basis method once you have made this election to use an average
basis method. This would be considered a change in an accounting method.
You would need to request consent to change your method on Form 3115 (PDF), Application for Change in Accounting Method.
For more information, refer to Publication 564, Mutual Fund Distributions, Publication 538, Accounting Periods and Methods,
Instructions for Form 3115, Application for Change in Accounting Method, Revenue
Procedure 97-27, and Section 9.03 of Revenue Procedure 2003-1.
I own stock which became worthless last year. Can I take a bad debt
deduction on my tax return?11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture
If you own securities 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 if they were capital assets in your hands.
Report worthless securities on line 1 or line 8 of Form 1040, Schedule D (PDF), whichever applies. In columns (c) and (d), write "Worthless." For additional information, refer to Publication 550, Investment Income and Expenses (Including Capital Gains
and Losses). For more information on bad debts, refer to Tax Topic 453, Bad
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?11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges
If you have qualified business use of your home and enough gross income
from that business use to that entitle you to a depreciation deduction, you
are required to reduce your basis in the home by the amount of depreciation
allowed (deducted) or allowable (could have been deducted).
Whether you choose to deduct the depreciation on your current return(s)
will not matter. For tax purposes, you will still be treated as if you had
taken the allowable deduction, and your basis will have to be reduced. For
more information, refer to Publication 946, How to Depreciate Property, Publication 544, Sales and Other Dispositions of Assets, and Publication 587, Business Use of Your Home.
We are selling rental property and have never claimed depreciation.
What do we do about this when we file our taxes?
When reporting the sale of or computing gain or loss on rental property,
you are required to make an adjustment to your basis for allowable depreciation
regardless of whether the deduction was taken. For more information refer
to Publication 544, Sale or Other Dispositions of Assets, and
Instructions for Form 4797, Sales of Business Property.
If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting
Method, to claim the depreciation that should have been taken. The Form
3115 must be timely filed for the same tax year in which you sell the rental
property or an earlier tax year. If you placed in service the rental property
only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax
Return, to take deductions for the claimed depreciation.
I just sold a commercial rental property my wife and I had purchased
thirty years ago (before she passed away) and I want to know how to figure
my cost basis. Is it the full appraised value at the time of her death, or
is it just half?
The answer depends on in which state you live in. Generally, the basis
of property you inherit is its Fair Market Value (FMV) at the date of the
decedent's death. If you live in a community property state (Arizona, California,
Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), and
inherit your spouse's interest in a property held as community property, then
the basis for the entire property becomes the FMV at the date of your spouse's
death. This also assumes that at least half the value of the community property
interest is included in the deceased spouse's gross estate. In other states,
where the property is owned by you and your spouse as joint tenants, tenants
by the entireties, or tenants-in-common, the basis of the one-half that your
spouse owned would be increased to one-half of the FMV of the property at
the date of death. The basis in the one-half that you owned would remain at
the one-half of the pre-death adjusted basis. The new adjusted basis is, naturally,
subject to all future routine basis adjustments until the property is either
sold or otherwise disposed of.
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