| Publication 17 |
2008 Tax Year |
This chapter discusses how to figure your basis in property. It is divided into the following sections.
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Cost basis.
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Adjusted basis.
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Basis other than cost.
Your basis is the amount of your investment in property for tax purposes. Use the basis to figure gain or loss on the sale,
exchange, or other disposition of property. Also use it to figure deductions for depreciation, amortization, depletion, and
casualty losses.
If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based
on the use. Only the basis allocated to the business or investment use of the property can be depreciated.
Your original basis in property is adjusted (increased or decreased) by certain events. For example, if you make improvements
to the property, increase your basis. If you take deductions for depreciation or casualty losses, or claim certain credits,
reduce your basis.
Keep accurate records of all items that affect the basis of your property. For more information on keeping records, see chapter 1.
Useful Items - You may want to see:
Publication
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15-B
Employer's Tax Guide to Fringe Benefits
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525
Taxable and Nontaxable Income
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535
Business Expenses
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537
Installment Sales
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544
Sales and Other Dispositions of Assets
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550
Investment Income and Expenses
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551
Basis of Assets
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564
Mutual Fund Distributions
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946
How To Depreciate Property
The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property,
or services. Your cost also includes amounts you pay for the following items:
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Sales tax,
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Freight,
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Installation and testing,
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Excise taxes,
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Legal and accounting fees (when they must be capitalized),
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Revenue stamps,
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Recording fees, and
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Real estate taxes (if you assume liability for the seller).
In addition, the basis of real estate and business assets may include other items.
Loans with low or no interest.
If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase
price minus any amount considered to be unstated interest. You generally have unstated interest if your interest rate is less
than the applicable federal rate.
For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537.
Real property, also called real estate, is land and generally anything built on, growing on, or attached to land.
If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property.
Lump sum purchase.
If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the
buildings. Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the
time of purchase. Figure the basis of each asset by multiplying the lump sum by a fraction. The numerator is the FMV of that
asset and the denominator is the FMV of the whole property at the time of purchase.
If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values
for real estate tax purposes.
Fair market value (FMV).
FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having
to buy or sell, and both having reasonable knowledge of all the necessary facts. Sales of similar property on or about the
same date may be helpful in figuring the FMV of the property.
Assumption of mortgage.
If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes
the amount you pay for the property plus the amount to be paid on the mortgage.
Settlement costs.
Your basis includes the settlement fees and closing costs you paid for buying the property. (A fee for buying property
is a cost that must be paid even if you buy the property for cash.) Do not include fees and costs for getting a loan on the
property in your basis.
The following are some of the settlement fees or closing costs you can include in the basis of your property.
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Abstract fees (abstract of title fees).
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Charges for installing utility services.
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Legal fees (including fees for the title search and preparation of the sales contract and deed).
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Recording fees.
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Survey fees.
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Transfer taxes.
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Owner's title insurance.
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Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for
improvements or repairs, and sales commissions.
Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
The following are some of the settlement fees and closing costs you cannot include in the basis of property.
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Casualty insurance premiums.
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Rent for occupancy of the property before closing.
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Charges for utilities or other services related to occupancy of the property before closing.
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Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums,
loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender.
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Fees for refinancing a mortgage.
Real estate taxes.
If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat
those taxes as part of your basis. You cannot deduct them as an expense.
If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year
of purchase. Do not include that amount in the basis of your property. If you did not reimburse the seller, you must reduce
your basis by the amount of those taxes.
Points.
If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do
not add the points to the basis of the related property. Generally, you deduct the points over the term of the loan. For more
information on how to deduct points, see chapter 23.
Points on home mortgage.
Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. If certain
requirements are met, you can deduct the points in full for the year in which they are paid. Reduce the basis of your home
by any seller-paid points.
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 cost of the property. The result
is the adjusted basis.
Increase the basis of any property by all items properly added to a capital account. Examples of items that increase basis
are shown in Table 13-1. These include the items discussed below.
Improvements.
Add to your basis in property the cost of improvements having a useful life of more than 1 year, that 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 to the basis of property assessments for improvements such as streets and sidewalks if they increase the value
of the property assessed. Do not deduct them as taxes. However, you can deduct as taxes assessments for maintenance or repairs,
or for meeting interest charges related to the improvements.
Example.
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 property's basis. In this example, the assessment is a depreciable
asset.
Decrease the basis of any property by all items that represent a return of capital for the period during which you held the
property. Examples of items that decrease basis are shown in Table 13-1. These include the items discussed below.
Table 13-1. Examples of Adjustments to Basis
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Increases to Basis
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Decreases to Basis
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| • Capital improvements: |
• Exclusion from income of |
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Putting an addition on your home |
subsidies for energy conservation |
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Replacing an entire roof |
measures |
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Paving your driveway |
|
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Installing central air conditioning |
• Casualty or theft loss deductions |
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Rewiring your home |
and insurance reimbursements |
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| • Assessments for local improvements: |
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Water connections |
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Extending utility service lines to the
property
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• Postponed gain from the sale of a home |
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Sidewalks |
• Alternative motor vehicle credit
(Form 8910)
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Roads |
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• Alternative fuel vehicle refueling |
| |
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property credit (Form 8911) |
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|
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| |
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• Residential energy efficient property
credit (Form 5695)
|
| |
|
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| • Casualty losses: |
• Depreciation and section 179 deduction |
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Restoring damaged property |
|
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• Nontaxable corporate distributions |
| • Legal fees: |
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Cost of defending and perfecting a title |
• Certain canceled debt excluded from |
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Fees for getting a reduction of an assessment |
income |
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| • Zoning costs |
• Easements |
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|
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• Adoption tax benefits |
Casualty and theft losses.
If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement
and by any deductible loss not covered by insurance.
You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty
condition.
For more information on casualty and theft losses, see chapter 25.
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 (including any special depreciation allowance), on your tax returns under the method
of depreciation you selected.
For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for
Form 4562.
Example.
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 duplex's adjusted
basis after the restoration to determine depreciation for the rest of the property's recovery period. Figure the adjusted
basis of the duplex as follows:
Note.
Your basis in the land is its original cost of $5,000.
Easements.
The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest
in 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 gain is on a capital asset, see chapter 16 for information about how to report it. If the gain is on property used in a trade or business, see Publication 544 for information
about how to report it.
Exclusion 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 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 12.
Postponed gain from sale of home.
If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis
of the home you acquired as a replacement by the amount of the postponed gain. For more information on the rules for the sale
of a home, see chapter 15.
There are many times when you cannot use cost as basis. In these cases, the fair market value or the adjusted basis of the
property can be used. Fair market value (FMV) and adjusted basis were discussed earlier.
Property Received for Services
If you receive property for your services, include its 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.
Restricted property.
If you receive property for your services and the property is subject to certain restrictions, your basis in the property
is its FMV when it becomes substantially vested. However, this rule does not apply if you make an election to include in income
the FMV of the property at the time it is transferred to you, less any amount you paid for it. Property is substantially vested
when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing
it). For more information, see Restricted Property in Publication 525.
Bargain purchases.
A bargain purchase is a purchase of an item for less than its FMV. If, as compensation for services, you buy goods
or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income.
Your basis in the property is its FMV (your purchase price plus the amount you include in income).
If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference
in income. However, your basis in the property is still its FMV. See Employee Discounts in Publication 15-B.
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.
If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation,
figure the basis of the replacement property using the basis of the converted property.
Similar or related property.
If you receive replacement property similar or related in service or use to the converted property, the replacement
property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments.
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Decrease the basis by the following.
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Any loss you recognize on the involuntary conversion.
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Any money you receive that you do not spend on similar property.
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Increase the basis by the following.
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Any gain you recognize on the involuntary conversion.
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Any cost of acquiring the replacement property.
Money or property not similar or related.
If you receive money or property not similar or related in service or use to the converted property, and you buy
replacement property similar or related in service or use to the converted property, the basis of the replacement property
is its cost decreased by the gain not recognized on the conversion.
Example.
The state condemned your property. The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. You
realized a gain of $5,000 ($31,000 − $26,000). You bought replacement property similar in use to the converted property for
$29,000. You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Your unrecognized
gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. The basis of the replacement
property is figured as follows:
Allocating the basis.
If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective
costs.
Basis for depreciation.
Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion.
For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946.
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 generally the same as the basis of the property you transferred. See
Nontaxable Trades
in chapter 14.
The exchange of property for the same kind of property is the most common type of nontaxable exchange. To qualify as a like-kind
exchange, the property traded and the property received must be both of the following.
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Qualifying property.
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Like-kind property.
The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. If you trade
property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property
you gave up increased by the money you paid.
Qualifying property.
In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property
you give up and the property you receive.
Like-kind property.
There must be an exchange of like-kind property. Like-kind properties are properties of the same nature or character,
even if they differ in grade or quality. The exchange of real estate for real estate and personal property for similar personal
property are exchanges of like-kind property.
Example.
You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. The dealer
allows you $2,000 on the old truck, and you pay $4,800. This is a like-kind exchange. The basis of the new truck is $6,500
(the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800).
If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you
have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). The basis of the new truck
is the price you pay the dealer.
Partially nontaxable exchanges.
A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind
property. The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following
adjustments.
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Decrease the basis by the following amounts.
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Any money you receive.
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Any loss you recognize on the exchange.
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Increase the basis by the following amounts.
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Any additional costs you incur.
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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.
Allocation of basis.
If you receive like-kind and unlike properties in the exchange, 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-kind property.
More information.
See Like-Kind Exchanges in chapter 1 of Publication 544 for more information.
Basis for depreciation.
Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange.
For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946.
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 that is incident to divorce. However, for property
transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed,
plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred.
If the property transferred to you is a series E, series EE, or series I U.S. savings bond, the transferor must include in
income the interest accrued to the date of transfer. Your basis in the bond immediately after the transfer is equal to the
transferor's basis increased by the interest income includible in the transferor's income. For more information on these bonds,
see chapter 7.
At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period
of the property as of the date of the transfer.
For more information about the transfer of property from a spouse, see chapter 14.
Property Received as a Gift
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 FMV at the time it was given to you, and any gift tax paid on it.
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 same as the donor's
adjusted basis plus or minus any required adjustments 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 adjustments to basis while you held the property. See
Adjusted Basis,
earlier.
Example.
You received an acre of land as a gift. At the time of the gift, the land had an FMV of $8,000. The donor's adjusted basis
was $10,000. After you received the property, no events occurred to increase or decrease your basis. If you later sell the
property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift
($10,000) as your basis to figure gain. If you sell the property for $7,000, you will have a $1,000 loss because you must
use the FMV at the time of the gift ($8,000) as your basis to figure loss.
If the sales price is between $8,000 and $10,000, you have neither gain nor loss.
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.
FMV equal to or greater than donor's adjusted basis.
If the FMV of the property 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, explained later.
Also, for figuring gain or loss from a sale or other disposition 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.
If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part
of the gift tax paid on it due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid
by a 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 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 2008, 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 $38,000 ($50,000 minus the $12,000 annual exclusion). She paid a gift tax of
$7,760 on the property. Your basis is $26,130, figured as follows:
Note.
If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it.
However, your basis cannot exceed the FMV of the gift at the time it was given to you.
Your basis in property you inherit from a decedent is generally one of the following.
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The FMV of the property at the date of the decedent's death.
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The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation.
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The value under the special-use valuation method for real property used in farming or a closely held business if elected for
estate tax purposes.
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The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified
conservation easement.
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.
For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
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.
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.
Property Changed From Personal to Business or Rental Use
If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate
the property at the time of the change. To do so, you must figure its basis for depreciation. An example of changing property
held for personal use to business or rental use would be renting out your former personal residence.
Basis for depreciation.
The basis for depreciation is the lesser of the following amounts.
Example.
Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. You paid $20,000 for permanent improvements
to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use
last year. Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation.
Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). On the same date, your
property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. The basis for figuring
depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000).
Sale of property.
If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether
you are figuring gain or loss.
Gain.
The basis for figuring a gain is your adjusted basis in the property when you sell the property.
Example.
Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation
deductions of $37,500. Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500).
Loss.
Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time
of the change to business or rental use. Then make adjustments (increases and decreases) for the period after the change in
the property's use, as discussed earlier under
Adjusted Basis
.
Example.
Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation
deductions of $37,500. In this case, you would start with the FMV on the date of the change to rental use ($180,000), because
it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Reduce that amount ($180,000) by
the depreciation deductions ($37,500). The basis for loss is $142,500 ($180,000 − $37,500).
The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording
or transfer fees. If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous
owner's adjusted basis, as discussed earlier.
You must adjust the basis of stocks for certain events that occur after purchase. For example, if you receive additional stock
from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis
of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is
identical to the stock held. Also reduce your basis when you receive nontaxable distributions. They are a return of capital.
Example.
In 2006 you bought 100 shares of XYZ stock for $1,000 or $10 a share. In 2007 you bought 100 shares of XYZ stock for $1,600
or $16 a share. In 2008 XYZ declared a 2-for-1 stock split. You now have 200 shares of stock with a basis of $5 a share and
200 shares with a basis of $8 a share.
Other basis.
There are other ways to figure the basis of stocks or bonds depending on how you acquired them. For detailed information,
see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550.
Identifying stocks 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 stocks or bonds. 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. For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550.
Mutual fund shares.
If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by
a custodian or agent, you can elect to use an average basis. For more information, see Publication 564.
Bond premium.
If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized
premium you deduct each year. See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Although you cannot deduct the premium on a tax-exempt bond, you must
amortize the premium each year and reduce your basis in the bond by the amortized amount.
Original issue discount (OID) on debt instruments.
You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments.
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, and 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. See chapter 4 of Publication 550.
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