Publication 225 |
2008 Tax Year |
Your basis is the amount of your investment in property for tax purposes. Use basis to figure the gain or loss on the sale,
exchange, or other disposition of property. Also use basis to figure 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 assets. For information on keeping records, see chapter 1.
Topics - This chapter discusses:
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Cost basis
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Adjusted basis
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Basis other than cost
Useful Items - You may want to see:
See chapter 16 for information about getting publications and forms.
The basis of property you buy is usually its cost. Cost is the amount you pay in cash, debt obligations, other property, or
services. Your cost includes amounts you pay for sales tax, freight, installation, and testing. The basis of real estate and
business assets will include other items. Basis generally does not include interest payments. However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535.
You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Under the uniform
capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property.
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 the amount considered to be unstated interest. You generally have unstated interest if your interest
rate is less than the applicable federal rate. See the discussion of unstated interest in Publication 537, Installment Sales.
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. Some of these
expenses are discussed next.
Lump sum purchase.
If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis
between the land and improvements. Allocate the cost basis according to the respective fair market values (FMVs) of the land
and improvements 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.
Fair market value (FMV).
FMV is the price at which 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 necessary facts. Sales of similar property on or about the same
date may help in figuring the FMV of the property.
If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values
for real estate tax purposes.
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.
If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense.
Whether or not you reimburse the seller, do not include that amount in the basis of your property.
Settlement costs.
Your basis includes the settlement fees and closing costs for buying the property. See Publication 551 for a detailed
list of items you can and cannot include in basis.
Do not include fees and costs for getting a loan on the property. Also, do not include amounts placed in escrow for
the future payment of items such as taxes and insurance.
Points.
If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points
to the basis of the related property. You may be able to deduct the points currently or over the term of the loan. For more
information about deducting points, see Points in chapter 4 of Publication 535.
Assumption of a mortgage.
If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount
you pay for the property plus the amount you owe on the mortgage.
Example.
If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000.
Constructing assets.
If you build property or have assets built for you, your expenses for this construction are part of your basis. Some
of these expenses include the following costs:
In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following
expenses. You must capitalize them (include them in the asset's basis).
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Employee wages paid for the construction work, reduced by any employment credits allowed.
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Depreciation on equipment you own while it is used in the construction.
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Operating and maintenance costs for equipment used in the construction.
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Business supplies and materials used in the construction.
Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct.
In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property
that consists of separate items. To determine the basis of these assets or separate items, there must be an allocation of
basis.
Group of assets acquired.
If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Use this allocation to figure
your basis for depreciation and gain or loss on a later disposition of any of these assets. You and the seller may agree in
the sales contract to a specific allocation of the purchase price among the assets. If this allocation is based on the value
of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted.
Farming business acquired.
If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the
purchase price among the assets. Generally, reduce the purchase price by any cash received. Allocate the remaining purchase
price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information.
Transplanted embryo.
If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase
price equal to the FMV of the cow without the implant. Allocate the rest of the purchase price to the basis of the calf. Neither
the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense.
Quotas and allotments.
Certain areas of the country have quotas or allotments for commodities such as milk, tobacco, and peanuts. The cost
of the quota or allotment is its basis. If you acquire a right to a quota with the purchase of land or a herd of dairy cows,
allocate part of the purchase price to that right based on its FMV and the FMV of the land or herd.
Uniform Capitalization Rules
Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce
or in your inventory costs, rather than claim them as a current deduction. You recover these costs through depreciation, amortization,
or cost of goods sold when you use, sell, or otherwise dispose of the property.
Generally, you are subject to the uniform capitalization rules if you do any of the following:
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Produce real or tangible personal property, or
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Acquire property for resale. However, this rule does not apply to personal property if your average annual gross receipts
for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less.
You produce property if you construct, build, install, manufacture, develop, improve, or create the property.
You are not subject to the uniform capitalization rules if the property is produced for personal use.
In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants
and animals.
Plants.
A plant produced in a farming business includes the following items:
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A fruit, nut, or other crop-bearing tree;
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An ornamental tree;
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A vine;
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A bush;
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Sod; and
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The crop or yield of a plant that will have more than one crop or yield.
Animals.
An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life.
The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Preparatory
costs include the acquisition costs of the seed, seedling, plant, or animal. For plants, preproductive period costs include
the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. For animals, preproductive period
costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding.
Exceptions.
In a farming business, the uniform capitalization rules do not apply to:
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Any animal,
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Any plant with a preproductive period of 2 years or less, or
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Any costs of replanting certain plants lost or damaged due to casualty.
Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method
of accounting. See Accrual method required under Accounting Methods in chapter 2.
In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more
than 2 years. If you make this election, special rules apply. This election cannot be made by a corporation, partnership,
or tax shelter required to use an accrual method of accounting. This election also does not apply to any costs incurred for
the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first
4 years the trees were planted.
If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property
used in any of your farming businesses and placed in service in any tax year during which the election is in effect.
Example.
You grow trees that have a preproductive period of more than 2 years. The trees produce an annual crop. You are an individual
and the uniform capitalization rules apply to your farming business. You must capitalize the direct costs and an allocable
part of indirect costs incurred due to the production of the trees. You are not required to capitalize the costs of producing
the annual crop because its preproductive period is 2 years or less.
Preproductive period of more than 2 years.
The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide
weighted average preproductive period. Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted
average preproductive period of more than 2 years. Other plants (not shown in Table 6-1) may also have a nationwide weighted
average preproductive period of more than 2 years.
More information.
For more information on the uniform capitalization rules that apply to property produced in a farming business, see
Regulations section 1.263A-4.
Table 6-1. Plants With a Preproductive Period of More Than 2 Years
Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. |
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Almonds
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Apples
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Apricots
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Avocados
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Blackberries
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Blueberries
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Cherries
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Chestnuts
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Coffee beans
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Currants
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Dates
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Figs
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Grapefruit
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Grapes
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Guavas
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Kiwifruit
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Kumquats
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Lemons
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Limes
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Macadamia nuts
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Mangoes
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Nectarines
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Olives
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Oranges
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Papayas
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Peaches
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Pears
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Pecans
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Persimmons
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Pistachio nuts
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Plums
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Pomegranates
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Prunes
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Raspberries
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Tangelos
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Tangerines
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Tangors
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Walnuts
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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 of the property.
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 costs increase the basis of property.
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The cost of extending utility service lines to property.
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Legal fees, such as the cost of defending and perfecting title.
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Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements.
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Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Do not deduct
these expenses as taxes. However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest
charges related to the improvements.
If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate
depreciable property using the rules that would apply to the original property if you had placed it in service at the same
time you placed the addition or improvement in service. See chapter 7.
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 are deductible as business expenses and are not added to basis. However, you can elect either to deduct or
to capitalize certain other costs. See chapter 7 in Publication 535.
The following are some items that reduce the basis of property.
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Section 179 deduction.
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Deductions previously allowed or allowable for amortization, depreciation, and depletion.
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Alternative motor vehicle credit. See Form 8910.
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Alternative fuel vehicle refueling property credit. See Form 8911.
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Residential energy efficient property credits. See Form 5695.
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Investment credit (part or all) taken.
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Casualty and theft losses and insurance reimbursements.
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Payments you receive for granting an easement.
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Exclusion from income of subsidies for energy conservation measures.
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Certain canceled debt excluded from income.
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Rebates from a manufacturer or seller.
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Patronage dividends received from a cooperative association as a result of a purchase of property. See Patronage Dividends in chapter 3.
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Gas-guzzler tax. See Form 6197.
Some of these items are discussed next. For a more detailed list of items that decrease basis, see section 1016 of the Internal
Revenue Code and Publication 551.
Depreciation and section 179 deduction.
The adjustments you must make to the basis of property if you take the section 179 deduction or depreciate the property
are explained next. For more information on these deductions, see chapter 7.
Section 179 deduction.
If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease
the basis of the property by the deduction.
Depreciation.
Decrease the basis of 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 or 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 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 7 for information on figuring the depreciation you should have claimed.
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.
Casualty and theft losses.
If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement.
Also, decrease it by any deductible loss not covered by insurance. See chapter 11 for information about figuring your casualty
or theft loss.
You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and
repairs that restore the property to its pre-casualty condition. 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 proceeds from the sale of an interest
in the 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 3.
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 an energy conservation measure for a dwelling unit. Reduce the basis of the property by the excluded amount.
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 any of the following.
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Debt canceled in a bankruptcy case or when you are insolvent.
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Qualified farm debt.
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Qualified real property business debt (provided you are not a C corporation).
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Qualified principal residence indebtedness.
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Discharge of certain indebtedness of a qualified individual because of Midwestern disasters.
If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable
property. If you exclude canceled debt described in (3), you must only 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 or qualified principal residence indebtedness,
see chapter 3. For more information about qualified real property business debt, see Publication 334, Tax Guide for Small
Business. For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected
Taxpayers in the Midwestern Disaster Areas.
There are times when you cannot use cost as basis. In these situations, the fair market value or the adjusted basis of property
may be used. Examples are discussed next.
Property changed from personal to business or rental use.
When you hold property for personal use and then change it to business use or use it to produce rent, you must figure
its basis for depreciation. An example of changing property from personal to rental use would be renting out your personal
residence.
If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or
loss. The basis for figuring a gain is your adjusted basis in the property when you sell the property. 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.
The basis for depreciation is the lesser of:
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.
Example.
George Smith is an accountant and also operates a farming business. George agreed to do some accounting work for his neighbor
in exchange for a dairy cow. The accounting work and the cow are each worth $1,500. George must include $1,500 in income for
his accounting services. George's basis in the cow is $1,500.
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. A taxable exchange occurs when you receive cash or get property that is not similar
or related in use to the property exchanged. 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.
Example.
You trade a tract of farmland 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.
If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis
of the replacement property you receive using the basis of the converted property.
Similar or related property.
If the replacement property is similar or related in service or use to the converted property, the replacement property's
basis is the same as the old property's basis on the date of the conversion. However, make the following adjustments.
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Decrease the basis by the following amounts.
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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 amounts.
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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 involuntary conversion.
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 Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7.
For more information about involuntary conversions, see chapter 11.
A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. A nontaxable gain
or loss also is known as an unrecognized gain or loss. If you receive property in a nontaxable exchange, its basis is usually
the same as the basis of the property you transferred.
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 8.
The basis of the property you receive generally is the same as the adjusted basis of the property you gave up.
Example 1.
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 is $14,000. Because this is a nontaxable exchange, you do not recognize any
gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded.
Example 2.
You trade a machine (adjusted basis of $8,000) for another like-kind machine (FMV of $9,000). You use both machines in your
farming business. The basis of the machine you receive 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, and deed preparation fees. Add them to the basis of the like-kind property you receive.
Property plus cash.
If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted
basis of the property you gave up plus the money you paid.
Example.
You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Your basis in the new truck
is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash).
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 unless the loss is not deductible under the related party
rules. 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 8.
Exchange of business property.
Exchanging the property of one business for the property of another business generally is a multiple property exchange.
For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544.
Basis for depreciation.
Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction.
For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7.
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.
Example 1.
You trade farmland (basis of $10,000) for another tract of farmland (FMV of $11,000) and $3,000 cash. You realize 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 received. Your basis in the land you received
is figured as follows.
Example 2.
You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. You realize 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.
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.
Example.
You traded a tractor with an adjusted basis of $15,000 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 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.
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.
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 depreciating the new tractor would then be $13,500 ($11,500 + $2,000, the adjusted 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.
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 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 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.
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 the following 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 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. Your basis, $26,130, is 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 when it was given to you.
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 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.)
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 farmland 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.
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,
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.
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, see Property Settlements in Publication 504, Divorced or Separated Individuals.
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. If a federal estate return is filed, you can use its appraised
value.
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The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation.
For information on the alternate valuation, see the Instructions for Form 706.
-
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.
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-use valuation method.
Under certain conditions, when a person dies, the executor or personal representative of that person's estate may
elect to value qualified real property at other than its FMV. If so, the executor or personal representative values the qualified
real property based on its use as a farm or other closely held business. If the executor or personal representative elects
this method of valuation for estate tax purposes, this value is the basis of the property for the qualified 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 an 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 does not apply if you dispose of the property in a like-kind
exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. The
tax also does not apply if you transfer the property to a member of your family and certain requirements are met.
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 resulted in the additional estate tax.
You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that:
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Contains your (and the estate's) name, address, and taxpayer identification number;
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Identifies the election as an election under section 1016(c) of the Internal Revenue Code;
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Specifies the property for which you are making the election; and
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Provides any additional information required by the Form 706-A instructions.
For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A,
and the related instructions.
Property Distributed From a Partnership or Corporation
The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from
a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder
with respect to the shareholder's ownership of stock in the corporation.
Partner's basis.
Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed
by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. However, the
basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced
by any money received in the same transaction. For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships.
Shareholder's basis.
The basis of property distributed by a corporation to a shareholder is its fair market value. For more information
about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations.
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