Adjusted Basis

Before figuring any 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 to the basis of the property. The result of these adjustments to the basis is the adjusted 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.

The following items increase the basis of property.

• The cost of extending utility service lines to property.
• Legal fees, such as the cost of defending and perfecting title.
• Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements.

If you make additions or improvements to business property, keep separate accounts for them. Also, depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. See chapter 8.

Assessments for local improvements. Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Do not deduct them as taxes. However, you can deduct as taxes charges that are for maintenance, repairs, or interest charges related to the improvements.

Deducting vs. capitalizing costs. Do not add to your basis costs you can deduct as current expenses. For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses, cannot be added to basis. However, you can choose either to deduct or to capitalize certain other costs. If you capitalize these costs, include them in your basis. If you deduct them, do not include them in your basis. See chapter 8 in Publication 535.

Decreases to Basis

The following items reduce the basis of property.

• The section 179 deduction.
• The deduction for clean-fuel vehicles and clean-fuel vehicle refueling property.
• Investment credit (part or all) taken.
• Casualty and theft losses and insurance reimbursements.
• Amounts you receive for granting an easement.
• Deductions previously allowed or allowable for amortization, depreciation, and depletion.
• Exclusion from income of subsidies for energy conservation measures.
• Credit for qualified electric vehicles.
• Gain from the sale of your home on which tax was postponed.
• Certain canceled debt excluded from income.
• Rebates received from a manufacturer or seller.
• Patronage dividends received as a result of a purchase of property. See Patronage Dividends (Distributions) in chapter 4.
• Gas-guzzler tax.

Some of these decreases to basis are discussed next.

Section 179 deduction. If you choose to take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. For more information, see Section 179 Deduction in chapter 8.

Deduction for clean-fuel vehicle and clean-fuel vehicle 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 amount of the deduction. For more information about these deductions, see chapter 12 in Publication 535.

Casualties and thefts. If you have a casualty or theft loss, decrease the basis of your property by the amount of any insurance or other reimbursement. Also, decrease it by any deductible loss not covered by insurance. See chapter 13 for information about figuring your casualty or theft loss.

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.

Easements. The amount you receive for granting an easement is usually 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. See Easements and rights-of-way in chapter 4.

Depreciation. Decrease the basis of your property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. If you took less depreciation than you could have under the method you chose, decrease the basis by the amount you could have taken under that method. If you did not take a depreciation deduction, reduce the basis by the full amount of depreciation you could have taken. If you deducted more depreciation than you should have, decrease your basis as follows. Decrease it by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year.

See chapter 8 for information on figuring the depreciation you should have claimed. See also Changing Your Accounting Method in chapter 8 for information that may benefit you if you deducted the wrong amount of depreciation.

In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules.

Exclusion from income of subsidies for energy conservation measures. You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any 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 Publication 525, Taxable and Nontaxable Income.

Credit for qualified electric vehicle. 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.

• $4,000.
• 10% of the vehicle's cost.

This reduction amount applies even if the credit allowed is less than that amount. For more information on this credit, see chapter 12 in Publication 535.

Canceled debt excluded from income. If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. A debt includes any indebtedness for which you are liable or which attaches to property you hold.

You can exclude your canceled debt from income if the debt is included in any of the following categories.

1. Debt that is canceled in a bankruptcy case or when you are insolvent.
2. Qualified farm debt.
3. Qualified real property business debt (provided you are not a C corporation).

If you exclude from income canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. However, for canceled debt described in (3) that you exclude from income, you must reduce the basis of your depreciable property by the excluded amount.

For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. For more information about insolvency and canceled debt that is qualified farm debt, see chapter 4. For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business.

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