Publication 550 |
2000 Tax Year |
Basis of Investment Property
Words you may need to know (see Glossary):
- Basis
- Fair market value
- Original issue discount (OID)
Basis is a way of measuring your investment in property for tax
purposes. You must know the basis of your property to determine
whether you have a gain or loss on its sale or other disposition.
Investment property you buy normally has an original basis equal to
its cost. If you get property in some way other than buying it, such
as by gift or inheritance, its fair market value may be important in
figuring the basis.
Cost Basis
The basis of property you buy is usually its cost. The cost is the
amount you pay in cash, debt obligations, or other property or
services.
Unstated interest.
If you buy property under a deferred-payment plan that charges
little or no interest, you may have to treat part of the purchase
price as interest. You must subtract this amount, if any, from your
cost to find your basis. For more information, see Unstated
Interest in Publication 537.
Basis Other Than Cost
There are times when you must use a basis other than cost. In these
cases, the fair market value or the adjusted basis of certain property
may be used.
Fair market value.
This is the price at which the property would change hands between
a buyer and a seller, neither being forced to buy or sell and both
having reasonable knowledge of all the relevant facts. Sales of
similar property, around the same date, may be helpful in figuring
fair market value.
Property Received for Services
If you receive investment property for services, you must include
the property's fair market value in income. The amount you include in
income then becomes your basis in the property. If the services were
performed for a price that was agreed to beforehand, this price will
be accepted as the fair market value of the property if there is no
evidence to the contrary.
Restricted property.
If you receive, as payment for services, property that is subject
to certain restrictions, your basis in the property generally is its
fair market value when it becomes substantially vested. Property
becomes substantially vested when it is transferable or is no longer
subject to substantial risk of forfeiture, whichever happens first.
See Restricted Property in Publication 525
for more
information.
Bargain purchases.
If you buy investment property at less than fair market value, as
payment for services, you must include the difference in income. Your
basis in the property is the price you pay plus the amount you include
in income.
Property Received
in Taxable Trades
If you received investment property in trade for other property,
the basis of the new property is its fair market value at the time of
the trade unless you received the property in a nontaxable trade.
Example.
You trade A Company stock for B Company stock having a fair market
value of $1,200. If the adjusted basis of the A Company stock is less
than $1,200, you have a taxable gain on the trade. If the adjusted
basis of the A company stock is more than $1,200, you have a
deductible loss on the trade. The basis of your B Company stock is
$1,200. If you later sell the B Company stock for $1,300, you will
have a gain of $100.
Property Received
in Nontaxable Trades
If you have a nontaxable trade, you do not recognize gain or loss
until you dispose of the property you received in the trade. See
Nontaxable Trades, later.
The basis of property you received in a nontaxable or partly
nontaxable trade is generally the same as the adjusted basis of the
property you gave up. Increase this amount by any cash you paid,
additional costs you had, and any gain recognized. Reduce this amount
by any cash or unlike property you received, any loss recognized, any
liability of yours that was assumed or treated as assumed.
Property Received
From Your Spouse
If property is transferred to you from your spouse (or former
spouse, if the transfer is incident to your divorce), your basis is
the same as your spouse's or former spouse's adjusted basis just
before the transfer. See Transfers Between Spouses, later.
Recordkeeping.
The transferor must give you
the records necessary to determine the adjusted basis and holding
period of the property as of the date of the transfer.
Property Received as a Gift
To figure your basis in property that you received as a gift, you
must know its adjusted basis to the donor just before it was given to
you, its fair market value at the time it was given to you, the amount
of any gift tax paid on it, and the date it was given to you.
Fair market value less than donor's adjusted basis.
If the fair market value of the property at the time of the gift
was less than the donor's adjusted basis just before the gift, your
basis for gain on its sale or other disposition is the same
as the donor's adjusted basis plus or minus any required adjustments
to basis during the period you hold the property. Your basis for
loss is its fair market value at the time of the gift plus
or minus any required adjustments to basis during the period you hold
the property.
No gain or loss.
If you use the basis for figuring a gain and the result is a loss,
and then use the basis for figuring a loss and the result is a gain,
you will have neither a gain nor a loss.
Example.
You receive a gift of investment property having an adjusted basis
of $10,000 at the time of the gift. The fair market value at the time
of the gift is $9,000. You later sell the property for $9,500. You
have neither gain nor loss. Your basis for figuring gain is $10,000,
and $10,000 minus $9,500 results in a $500 loss. Your basis for
figuring loss is $9,000, and $9,500 minus $9,000 results in a $500
gain.
Fair market value equal to or more than donor's adjusted
basis.
If the fair market value of the property at the time of the gift
was equal to or more than the donor's adjusted basis just before the
gift, your basis for gain or loss on its sale or other
disposition is the donor's adjusted basis plus or minus any required
adjustments to basis during the period you hold the property. Also,
you may be allowed to add to the donor's adjusted basis all or part of
any gift tax paid, depending on the date of the gift.
Gift received before 1977.
If you received property as a gift before 1977, your basis in the
property is the donor's adjusted basis increased by the total gift tax
paid on the gift. However, your basis cannot be more than the fair
market value of the gift at the time it was given to you.
Example 1.
You were given XYZ Company stock in 1976. At the time of the gift,
the stock had a fair market value of $21,000. The donor's adjusted
basis was $20,000. The donor paid a gift tax of $500 on the gift. Your
basis for gain or loss is $20,500, the donor's adjusted basis plus the
amount of gift tax paid.
Example 2.
The facts are the same as in Example 1 except that the gift tax
paid was $1,500. Your basis is $21,000, the donor's adjusted basis
plus the gift tax paid, but limited to the fair market value of the
stock at the time of the gift.
Gift received after 1976.
If you received property as a gift after 1976, your basis is the
donor's adjusted basis increased by the part of the gift tax paid that
was for the net increase in value of the gift. You figure this part by
multiplying the gift tax paid on the gift by a fraction. The numerator
(top part) is the net increase in value of the gift and the
denominator (bottom part) is the amount of the gift.
The net increase in value of the gift is the fair market value 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.
Example.
In 2000, you received a gift of property from your mother. At the
time of the gift, the property had a fair market value of $100,000 and
an adjusted basis to her of $40,000. The amount of the gift for gift
tax purposes was $90,000 ($100,000 minus the $10,000 annual
exclusion), and your mother paid a gift tax of $21,000. You figure
your basis in the following way:
Fair market value |
$100,000 |
Minus: Adjusted basis |
40,000 |
Net increase in value of gift |
$60,000 |
Gift tax paid |
$21,000 |
Multiplied by .667 ($60,000 x $90,000)
|
.667 |
Gift tax due to net increase in value |
$14,007 |
Plus: Adjusted basis of property to your
mother |
40,000 |
Your basis in the property |
$54,007 |
Part sale, part gift.
If you get property in a transfer that is partly a sale and partly
a gift, your basis is the larger of the amount you paid for the
property or the transferor's adjusted basis in the property at the
time of the transfer. Add to that amount the amount of any gift tax
paid on the gift, as described in the preceding discussion. For
figuring loss, your basis is limited to the property's fair market
value at the time of the transfer.
Gift tax information.
For information on gift tax, see Publication 950,
Introduction
to Estate and Gift Taxes.
Inherited Property
If you inherited property, your basis in that property generally is
its fair market value (its appraised value on the federal estate tax
return) on:
- The date of the decedent's death, or
- The later alternate valuation date if the estate qualifies
for, and elects to use, alternate valuation.
If no federal estate tax return was filed, use the appraised
value on the date of death for state inheritance or transmission
taxes.
Appreciated property you gave the decedent.
Your basis in certain appreciated property that you inherited is
the decedent's adjusted basis in the property immediately before death
rather than its fair market value. This applies to appreciated
property that you or your spouse gave the decedent as a gift during
the one-year period ending on the date of death. Appreciated property
is any property whose fair market value on the day you gave it to the
decedent was more than its adjusted basis.
More information.
See Publication 551,
Basis of Assets, for more
information on the basis of inherited property, including community
property, a joint tenancy or tenancy by the entirety, a qualified
joint interest, and a farm or business.
Adjusted Basis
Before you can figure any gain or loss on a sale, exchange, or
other disposition of property or figure allowable depreciation,
depletion, or amortization, you usually must make certain adjustments
(increases and decreases) to the basis of the property. The result of
these adjustments to the basis is the adjusted basis.
Adjustments to the basis of stocks and bonds are explained in the
following discussion. For information about other adjustments to
basis, see Publication 551.
Stocks and Bonds
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 as discussed earlier under Basis Other
Than Cost.
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.
Identifying stock or bonds sold.
If you can adequately identify the shares of stock or the bonds you
sold, their basis is the cost or other basis of the particular shares
of stock or bonds.
Identification not possible.
If you buy and sell securities at various times in varying
quantities and you cannot adequately identify the shares you sell, the
basis of the securities you sell is the basis of the securities you
acquired first. Except for certain mutual fund shares, discussed
later, you cannot use the average price per share to figure gain or
loss on the sale of the shares.
Example.
You bought 100 shares of stock of XYZ Corporation in 1986 for $10 a
share. In January 1987 you bought another 200 shares for $11 a share.
In July 1987 you gave your son 50 shares. In December 1989 you bought
100 shares for $9 a share. In April 2000 you sold 130 shares. You
cannot identify the shares you disposed of, so you must use the stock
you acquired first to figure the basis. The shares of stock you gave
your son had a basis of $500 (50 x $10). You figure the basis of
the 130 shares of stock you sold in 2000 as follows:
50 shares (50 x $10) balance of stock
bought in 1986 |
$500 |
80 shares (80 x $11) stock bought in
January 1987 |
880 |
Total basis of stock sold in 2000 |
$1,380 |
Adequate identification.
You will make an adequate identification if you show that
certificates representing shares of stock from a lot that you bought
on a certain date or for a certain price were delivered to your broker
or other agent.
Broker holds stock.
If you have left the stock certificates with your broker or other
agent, you will make an adequate identification if you:
- Tell your broker or other agent the particular stock to be
sold or transferred at the time of the sale or transfer, and
- Receive a written confirmation of this from your broker or
other agent within a reasonable time.
Single stock certificate.
If you bought stock in different lots at different times and you
hold a single stock certificate for this stock, you will make an
adequate identification if you:
- Tell your broker or other agent the particular stock to be
sold or transferred when you deliver the certificate to your broker or
other agent, and
- Receive a written confirmation of this from your broker or
other agent within a reasonable time.
Stock identified this way is the stock sold or transferred even
if stock certificates from a different lot are delivered to the broker
or other agent.
If you sell part of the stock represented by a single certificate
directly to the buyer instead of through a broker, you will make an
adequate identification if you keep a written record of the particular
stock that you intend to sell.
Bonds.
These methods of identification also apply to bonds sold or
transferred.
Stock in a mutual fund or REIT.
The basis of stock in a regulated investment company (mutual fund)
or a real estate investment trust (REIT) is generally figured in the
same way as the basis of other stock.
Mutual fund load charges.
Your cost basis in mutual fund stock often includes a sales fee,
also known as a load charge. But, in certain cases, you cannot include
the entire amount of a load charge in your basis if the charge gives
you a reinvestment right. For more information, see Publication 564.
Choosing average basis for mutual fund stock.
You can choose to use the average basis of mutual fund stock if you
acquired the stock at various times and prices and left it on deposit
in an account kept by a custodian or agent who acquires or redeems the
stock. The methods you can use to figure average basis are explained
in Publication 564.
Undistributed capital gains.
If you had to include in your income any undistributed capital
gains of the mutual fund or REIT, increase your basis in the stock by
the difference between the amount you included and the amount of tax
paid for you by the fund or REIT. See Undistributed capital gains
of mutual funds and REITs under Capital Gain Distributions
in chapter 1.
Automatic investment service.
If you participate in an automatic investment service, your basis
for each share of stock, including fractional shares, bought by the
bank or other agent is the purchase price plus a share of the broker's
commission.
Dividend reinvestment plans.
If you participate in a dividend reinvestment plan and receive
stock from the corporation at a discount, your basis is the full fair
market value of the stock on the dividend payment date. You must
include the amount of the discount in your income.
Public utilities.
If, before 1986, you excluded from income the value of stock you
had received under a qualified public utility reinvestment plan, your
basis in that stock is zero.
Stock dividends.
Stock dividends are distributions made by a corporation of its own
stock. Generally, stock dividends are not taxable to you. However, see
Distributions of Stock and Stock Rights under
Nontaxable Distributions in chapter 1
for some exceptions.
If the stock dividends are not taxable, you must divide your basis for
the old stock between the old and new stock.
New and old stock identical.
If the new stock you received as a nontaxable dividend is identical
to the old stock on which the dividend was declared, divide the
adjusted basis of the old stock by the number of shares of old and new
stock. The result is your basis for each share of stock.
Example 1.
You owned one share of common stock that you bought for $45. The
corporation distributed two new shares of common stock for each share
held. You then had three shares of common stock. Your basis in each
share is $15 ($45 x 3).
Example 2.
You owned two shares of common stock. You had bought one for $30
and the other for $45. The corporation distributed two new shares of
common stock for each share held. You had six shares after the
distribution--three with a basis of $10 each ($30 x 3) and
three with a basis of $15 each ($45 x 3).
New and old stock not identical.
If the new stock you received as a nontaxable dividend is not
identical to the old stock on which it was declared, the basis of the
new stock is calculated differently. Divide the adjusted basis of the
old stock between the old and the new stock in the ratio of the fair
market value of each lot of stock to the total fair market value of
both lots on the date of distribution of the new stock.
Example.
You bought a share of common stock for $100. Later, the corporation
distributed a share of preferred stock for each share of common stock
held. At the date of distribution, your common stock had a fair market
value of $150 and the preferred stock had a fair market value of $50.
You figure the basis of the old and new stock by dividing your $100
basis between them. The basis of your common stock is $75 ($150/$200
x $100), and the basis of the new preferred stock is $25
($50/$200 x $100).
Stock bought at various times.
Figure the basis of stock dividends received on stock you bought at
various times and at different prices by allocating to each lot of
stock the share of the stock dividends due to it.
Stock splits.
Figure the basis of stock splits in the same way as stock dividends
if identical stock is distributed on the stock held.
Taxable stock dividends.
If your stock dividend is taxable when you receive it, the basis of
your new stock is its fair market value on the date of distribution.
The basis of your old stock does not change.
Stock rights.
A stock right is a right to acquire a corporation's stock. It may
be exercised, it may be sold if it has a market value, or it may
expire. Stock rights are rarely taxable when you receive them. See
Distributions of Stock and Stock Rights under
Nontaxable Distributions in chapter 1.
Taxable stock rights.
If you receive stock rights that are taxable, the basis of the
rights is their fair market value at the time of distribution. The
basis of the old stock does not change.
Nontaxable stock rights.
If you receive nontaxable stock rights and allow them to expire,
they have no basis.
If you exercise or sell the nontaxable stock rights and if, at the
time of distribution, the stock rights had a fair market value of 15%
or more of the fair market value of the old stock, you must divide the
adjusted basis of the old stock between the old stock and the stock
rights. Use a ratio of the fair market value of each to the total fair
market value of both at the time of distribution.
If the fair market value of the stock rights was less than 15%,
their basis is zero. However, you can choose to divide the basis of
the old stock between the old stock and the stock rights. To make the
choice, attach a statement to your return for the year in which you
received the rights, stating that you choose to divide the basis of
the stock.
Basis of new stock.
If you exercise the stock rights, the basis of the new stock is its
cost plus the basis of the stock rights exercised.
Example.
You own 100 shares of ABC Company stock, which cost you $22 per
share. The ABC Company gave you 10 nontaxable stock rights that would
allow you to buy 10 more shares at $26 per share. At the time the
stock rights were distributed, the stock had a market value of $30,
not including the stock rights. Each stock right had a market value of
$3. The market value of the stock rights was less than 15% of the
market value of the stock, but you chose to divide the basis of your
stock between the stock and the rights. You figure the basis of the
rights and the basis of the old stock as follows:
100 shares x $22 = $2,200, basis of old stock
|
100 shares x $30 = $3,000, market value of old
stock |
10 rights x $3 = $30, market value of rights
|
($3,000 x $3,030) x $2,200 = $2,178.22,
new basis of old stock |
($30 x $3,030) x $2,200 = $21.78, basis of
rights |
If you sell the rights, the basis for figuring gain or loss is
$2.18 ($21.78 x 10) per right. If you exercise the rights, the
basis of the stock you acquire is the price you pay ($26) plus the
basis of the right exercised ($2.18), or $28.18 per share. The
remaining basis of the old stock is $21.78 per share.
Investment property received in liquidation.
In general, if you receive investment property as a distribution in
partial or complete liquidation of a corporation and if you recognize
gain or loss when you acquire the property, your basis in the property
is its fair market value at the time of the distribution.
S corporation stock.
You must increase your basis in stock of an S
corporation by your pro rata share of the following items.
- All income items of the S corporation, including tax-exempt
income, that are separately stated and passed through to you as a
shareholder.
- The nonseparately stated income of the S corporation.
- The amount of the deduction for depletion (other than oil
and gas depletion) that is more than the basis of the property being
depleted.
You must decrease your basis in stock of an S
corporation by your pro rata share of the following items.
- Distributions by the S corporation that were not included in
your income.
- All loss and deduction items of the S corporation that are
separately stated and passed through to you.
- Any nonseparately stated loss of the S corporation.
- Any expense of the S corporation that is not deductible in
figuring its taxable income and not properly chargeable to a capital
account.
- The amount of your deduction for depletion of oil and gas
wells to the extent the deduction is not more than your share of the
adjusted basis of the wells.
However, your basis in the stock cannot be reduced below zero.
Specialized small business investment company stock or
partnership interest.
If you bought this stock or interest as replacement property for
publicly traded securities you sold at a gain, you must reduce the
basis of the stock or interest by the amount of any postponed gain on
that sale. See Rollover of Gain From Publicly Traded
Securities, later.
Qualified small business stock.
If you bought this stock as replacement property for other
qualified small business stock you sold at a gain, you must reduce the
basis of this replacement stock by the amount of any postponed gain on
the earlier sale. See Gains on Qualified Small Business
Stock, later.
Short sales.
If you cannot deduct payments you make to a lender in lieu of
dividends on stock used in a short sale, the amount you pay to the
lender is a capital expense, and you must add it to the basis of the
stock used to close the short sale.
See Short Sales, later, for information about deducting
payments in lieu of dividends.
Premiums on bonds.
If you buy a bond at a premium, the premium is treated as part of
your basis in the bond. If you choose to amortize the premium paid on
a taxable bond, you must reduce the basis of the bond by the amortized
part of the premium each year over the life of the bond.
Although you cannot deduct the premium on a tax-exempt bond, you
must amortize it to determine your adjusted basis in the bond. You
must reduce the basis of the bond by the premium you amortized for the
period you held the bond.
See Bond Premium Amortization in chapter 3
for more
information.
Market discount on bonds.
If you include market discount on a bond in income currently,
increase the basis of your bond by the amount of market discount you
include in your income. See Market Discount Bonds in
chapter 1
for more information.
Acquisition discount on short-term obligations.
If you include acquisition discount on a short-term obligation in
your income currently, increase the basis of the obligation by the
amount of acquisition discount you include in your income. See
Discount on Short-Term Obligations in chapter 1
for more
information.
Original issue discount (OID) on debt instruments.
Increase the basis of a debt instrument by the amount of OID that
you include in your income. See Original Issue Discount (OID)
in chapter 1.
Discounted tax-exempt obligations.
OID on tax-exempt obligations is generally not taxable. However,
when you dispose of a tax-exempt obligation issued after September 3,
1982, that you acquired after March 1, 1984, you must accrue OID on
the obligation to determine its adjusted basis. The accrued OID is
added to the basis of the obligation to determine your gain or loss.
For information on determining OID on a long-term obligation, see
Debt Instruments Issued After July 1, 1982, and Before 1985
or Debt Instruments Issued After 1984, whichever
applies, in Publication 1212
under Figuring OID on Long-Term Debt
Instruments.
If the tax-exempt obligation has a maturity of 1 year or less,
accrue OID under the rules for acquisition discount on short-term
obligations. See Discount on Short-Term Obligations
in chapter 1.
Stripped tax-exempt obligation.
If you acquired a stripped tax-exempt bond or coupon after October
22, 1986, you must accrue OID on it to determine its adjusted basis
when you dispose of it. For stripped tax-exempt bonds or coupons
acquired after June 10, 1987, part of this OID may be taxable. You
accrue the OID on these obligations in the manner described in chapter 1
under Stripped Bonds and Coupons.
Increase your basis in the stripped tax-exempt bond or coupon by
the taxable and nontaxable accrued OID. Also increase your basis by
the interest that accrued (but was not paid, and was not previously
reflected in your basis) before the date you sold the bond or coupon.
In addition, for bonds acquired after June 10, 1987, add to your basis
any accrued market discount not previously reflected in basis.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|