Publication 225 |
2000 Tax Year |
Basis Other Than Cost
There are many times when you cannot use cost as basis. In these
cases, the fair market value or the adjusted basis of property may be
used. Adjusted basis is discussed earlier. Fair market value is
discussed next.
Fair market value (FMV).
Fair market value (FMV) is the price at which property would change
hands between a buyer and a seller, neither having to buy or sell, and
both having reasonable knowledge of all necessary facts. Sales of
similar property on or about the same date may help in figuring the
FMV of the property.
Property changed to business or rental use.
When you hold property for personal use and change it to business
use or use it to produce rent, you must figure its basis for
depreciation. An example of changing property held for personal use to
business use would be renting out your former personal residence.
Basis for depreciation.
The basis for depreciation is the lesser of the following amounts.
- The FMV of the property on the date of the change.
- Your adjusted basis on the date of the change.
Property received for services.
If you receive property for services, include the property's FMV in
income. The amount you include in income becomes your basis. If the
services were performed for a price agreed on beforehand, it will be
accepted as the FMV of the property if there is no evidence to the
contrary.
Taxable Exchanges
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. 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. A
taxable exchange occurs when you receive cash or get property that is
not similar or related in use to the property exchanged.
Example.
You trade a tract of farm land with an adjusted basis of $3,000 for
a tractor that has an FMV of $6,000. You must report a taxable gain of
$3,000 for the land. The tractor has a basis of $6,000.
Nontaxable Exchanges
A nontaxable exchange is an exchange in which you are not taxed on
any gain and you cannot deduct any loss. If you receive property in a
nontaxable exchange, its basis is usually the same as the basis of the
property you transferred. A nontaxable gain or loss also is known as
an unrecognized gain or loss.
Example.
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 was $14,000. If this was a
taxable exchange, you would recognize gain of $4,000 ($14,000 FMV of
the new truck minus the $10,000 adjusted basis of the old truck), and
your basis in the new truck would be $14,000. Because this is a
nontaxable exchange, you do not recognize the gain, and your basis in
the new truck is $10,000, the same as the adjusted basis of the old
truck you traded.
Like-Kind Exchanges
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 10.
The basis of the property you receive is the same as the basis of
the property you gave up.
Example.
You traded a machine (adjusted basis $8,000) for another like-kind
machine (FMV $9,000). You used both machines in your farming business.
The basis of the machine you received is $8,000, the same as the
machine traded.
Exchange expenses.
Exchange expenses generally are the closing costs that you pay.
They include such items as brokerage commissions, attorney fees, deed
preparation fees, etc. Add them to the basis of the like-kind property
you received.
Property plus cash.
If you trade property in a nontaxable exchange and also pay money,
the basis of the property you receive is the basis of the property you
gave up plus the money you paid.
Example.
You trade in a truck (adjusted basis $3,000) for another truck (FMV
$7,500) and pay $4,000. Your basis in the new truck is $7,000 (the
$3,000 basis of the old truck plus the $4,000 paid).
Special rules for related persons.
If a like-kind exchange takes place directly or indirectly between
related persons and either party disposes of the property within 2
years after the exchange, the exchange no longer qualifies for
like-kind exchange treatment. Each person must report any gain or loss
not recognized on the original exchange. Each person reports it on the
tax return filed for the year in which the later disposition occurred.
If this rule applies, the basis of the property received in the
original exchange will be its FMV. For more information, see chapter 10.
Exchange of business property.
Exchanging the property of one business for the property of another
business is a multiple property exchange. For information on figuring
basis, see Multiple Property Exchanges in chapter 1 of
Publication 544,
Sales and Other Dispositions of Assets.
Partially Nontaxable Exchange
A partially nontaxable exchange is an exchange in which you receive
unlike property or money in addition to like property. The basis of
the property you receive is the same as the basis of the property you
gave up with the following adjustments.
- Decrease the basis by the following amounts.
- Any money you receive.
- Any loss you recognize on the exchange.
- Increase the basis by the following amounts.
- Any additional costs you incur.
- Any gain you recognize on the exchange.
If the other party to the exchange assumes your liabilities,
treat the debt assumption as money you received in the exchange.
Example 1.
You traded farm land (basis $10,000) for another tract of farm land
(FMV $11,000). You also received $3,000 cash. You realized 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 you 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 traded a truck (adjusted basis $22,750) for another truck (FMV
$20,000). You also received $10,000 cash. You realized 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 |
Allocation of basis.
Allocate the basis first to the unlike property, other than money,
up to its FMV on the date of the exchange. The rest is the basis of
the like property.
Example.
You had an adjusted basis of $15,000 in a tractor you traded 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 your 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.
Sale and Purchase
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
depreciation for the new tractor would then be $13,500 ($11,500 +
$2,000, the 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.
Involuntary Conversions
If you receive property as a result of an involuntary conversion,
such as a casualty, theft, or condemnation, you may figure the basis
of the replacement property you receive using the basis of the
property destroyed, stolen, or condemned (old property).
Similar or related property.
If the replacement property is similar or related in service or use
to the old property, the replacement property's basis is the same as
the old property's basis on the date of the involuntary conversion.
However, make the following adjustments.
- Decrease the basis by the following amounts.
- Any loss you recognize on the involuntary conversion.
- Any money you receive that you do not spend on similar
property.
- Increase the basis by the following amounts.
- Any gain you recognize on the involuntary conversion.
- Any cost of acquiring the replacement property.
Money or property that is not similar or related.
If you receive money or property not similar or related in service
or use to the old property and you buy replacement property similar or
related in service or use to the old property, the basis of the
replacement property is its cost decreased by the gain not recognized
on the involuntary conversion.
For more information about involuntary conversions, see chapter 13.
Property Received
as a Gift
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.
FMV equal to or more than donor's adjusted basis.
If the FMV of the property is equal to or more than the donor's
adjusted basis, your basis is the donor's adjusted basis when 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 from a sale or other disposition of
the property, or for figuring depreciation, depletion, or amortization
deductions on business property, you must increase or decrease your
basis (the donor's adjusted basis) by any required adjustments to
basis while you held the property. See Adjusted Basis,
earlier.
Gift received before 1977.
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 when it was given to
you.
Example 1.
You were given a house in 1976 with an FMV of $21,000. The donor's
adjusted basis was $20,000. The donor paid a gift tax of $500. Your
basis is $20,500, the donor's adjusted basis plus the gift tax paid.
Example 2.
If, in Example 1, the gift tax paid had been $1,500, your basis
would be $21,000. This is the donor's adjusted basis plus the gift tax
paid, limited to the FMV of the house at the time you received the
gift.
Gift received after 1976.
If you received a gift after 1976, increase your basis in the gift
(the donor's adjusted 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 by multiplying the gift tax paid by the following fraction.
Fraction
The net increase in value of the gift is the FMV of the gift minus
the donor's adjusted basis. The amount of the gift is its value for
gift tax purposes after reduction by any annual exclusion and marital
or charitable deduction that applies to the gift. For information on
the gift tax, see Publication 950,
Introduction to Estate and
Gift Taxes.
Example.
In 2000, 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 $40,000 ($50,000 minus the $10,000
annual exclusion). She paid a gift tax of $9,000. Your basis, $26,750,
is figured as follows:
Fair market value |
$50,000 |
Minus: Adjusted basis |
-20,000 |
Net increase in value |
$30,000 |
Gift tax paid |
$9,000 |
Multiplied by ($30,000 x $40,000) |
x .75 |
Gift tax due to net increase in value |
$6,750 |
Adjusted basis of property to your mother |
+20,000 |
Your basis in the property |
$26,750 |
FMV less than donor's adjusted basis.
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 a loss when you dispose of the property. Your basis for figuring
gain is the donor's adjusted basis plus or minus any required
adjustment to basis while you held the property. Your basis for
figuring loss is its FMV when you received the gift plus or minus any
required adjustment to basis while you held the property. (See
Adjusted Basis, earlier.)
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 gain nor loss on the sale or other disposition of the
property.
Example.
You received farm land 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 in it.
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.
Business property.
If you hold the gift as business property, your basis for figuring
any depreciation, depletion, or amortization deductions is the same as
the donor's adjusted basis plus or minus any required adjustments to
basis while you hold the property.
Property Transferred
From a Spouse
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, adjust your basis for
any gain recognized by your spouse or former spouse on property
transferred in trust. This rule applies only to a transfer of property
in trust in which 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 records needed to determine the
adjusted basis and holding period of the property as of the date of
the transfer.
For more information, see Publication 504,
Divorced or
Separated Individuals.
Inherited Property
Your basis in property you inherit from a decedent is generally one
of the following.
- The FMV of the property at the date of the individual's
death.
- The FMV on the alternate valuation date, if the personal
representative for the estate chooses to use alternate valuation. For
information on the alternate valuation date, see the instructions for
Form 706.
- The value under the special-use valuation method for real
property used in farming or other closely held business, if chosen for
estate tax purposes. This method is discussed next.
- 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. For information on a qualified
conservation easement, see the instructions for Form 706.
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.
Special farm real property valuation.
Under certain conditions, when a person dies, the executor or
personal representative of that person's estate may choose to value
the qualified real property on other than its FMV. If so, the executor
or personal representative values the qualified real property based on
its use as a farm. If the executor or personal representative chooses
this method of valuation for estate tax purposes, this value is the
basis of the property for the heirs. The qualified heirs should be
able to get the necessary value from the executor or personal
representative of the estate.
If you are a qualified heir who received special-use valuation
property, increase your basis by any gain recognized by the estate or
trust because of post-death appreciation. Post-death appreciation is
the property's FMV on the date of distribution minus the property's
FMV either on the date of the individual's death or on the alternate
valuation date. Figure all FMVs without regard to the special-use
valuation.
You may be liable for the additional estate tax if, within 10 years
after the death of the decedent, you transfer the property or the
property stops being used as a farm. This tax may apply if you dispose
of the property in a like-kind exchange or involuntary conversion. The
tax does not apply if you transfer the property to a member of your
family and certain requirements are met. See Form 706-A and its
instructions for more information on this tax.
You can elect to increase your basis in special-use valuation
property if it becomes subject to the additional estate tax. To
increase your basis, you must make an irrevocable election and pay
interest on the additional estate tax figured from the date 9 months
after the decedent's death until the date of payment of the additional
estate tax. If you meet these requirements, increase your basis in the
property to its FMV on the date of the decedent's death or the
alternate valuation date. The increase in your basis is considered to
have occurred immediately before the event that results in the
additional estate tax.
You make the election by filing with Form 706-A, a statement
that does all the following.
- Contains your (and the estate's) name, address, and taxpayer
identification number.
- Identifies the election as an election under section 1016(c)
of the Internal Revenue Code.
- Specifies the property for which you are making the
election.
- Provides any additional information required by the Form
706-A instructions.
Community property.
In community property states (Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin),
husband and wife are each usually considered to own half the community
property. When either spouse dies, the total value of the community
property, even the part belonging to the surviving spouse, generally
becomes the basis of the entire property. For this rule to apply, at
least half the value of the community property interest must be
includible in the decedent's gross estate, whether or not the estate
must file a return.
For example, you and your spouse owned community property that had
a basis of $80,000. When your spouse died, half the FMV of the
community interest was includible in your spouse's estate. The FMV of
the community interest was $100,000. The basis of your half of the
property after the death of your spouse is $50,000 (half of the
$100,000 FMV). The basis of the other half to your spouse's heirs is
also $50,000.
For more information about community property, see Publication 555,
Community Property.
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