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 basis of the property. The result of these adjustments to the
basis is the adjusted basis.
Increases to Basis
Increase the basis of any property by all items properly added to a
capital account. These include the cost of any improvements having a
useful life of more than 1 year. Other items added to the basis of property
include the cost of extending utility service lines to the property
and legal fees, such as the cost of defending and perfecting title.
Improvements. Add the cost of improvements to your basis in
the property if they 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 assessments for
improvements such as streets and sidewalks to the basis of the property
if they increase the value of the property assessed. Do not deduct them
as taxes. However, you can deduct as taxes assessments for maintenance,
repairs, or interest charges on 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.
Decreases to Basis
The following items reduce the basis of your property.
- The section 179 deduction.
- The deduction for clean-fuel vehicles and clean-fuel vehicle refueling
property.
- Nontaxable corporate distributions (see chapter 9).
- Deductions previously allowed (or allowable) for amortization, depreciation,
and depletion.
- Exclusion of subsidies for energy conservation measures (see Energy conservation subsidies in chapter 13).
- Credit for qualified electric vehicles.
- Postponed gain from the sale of your home.
- Casualty and theft losses and insurance reimbursements.
- Certain canceled debt excluded from income.
- Rebates received from a manufacturer or seller.
- Easements.
- Gas-guzzler tax.
- Adoption tax benefits.
Table 14-1. Examples of Adjustments to Basis
Increases to Basis |
Decreases to Basis |
- Capital improvements:
- Putting an addition on your home
- Replacing an entire roof
- Paving your driveway
- Installing central air conditioning
- Rewiring your home
- Assessments for local improvements:
- Water connections
- Sidewalks
- Roads
- Costs of restoring damaged propertyafter a casualty loss
- Legal fees for defending and perfecting a title
|
- Exclusion from income of subsidies for energy conservation measures.
- Casualty or theft loss deductions and insurance reimbursements
- Credit for qualified electric vehicles
- Deduction for clean-fuel vehiclesand clean-fuel refueling property
- Nontaxable corporate distributions
|
Casualties and thefts. If you have a casualty or theft loss,
decrease the basis of 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 substantially prolong the life of the property, increase
its value, or adapt it to a different use. To make this determination,
compare the repaired property to the property before the casualty.
For more information on casualty and theft losses, see chapter 27.
Easements. The amount you receive for granting an easement is
generally considered to be 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 17 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.
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, on your tax
returns under the method of depreciation you selected.
For more information about depreciation and the section 179 deduction,
see Publication 946.
Credit for qualified electric vehicles. If you claim the credit
for a qualified electric vehicle, you must reduce your basis in that
vehicle by the lesser of the following amounts.
- $4,000.
- 10% of the vehicle's cost.
This basis reduction rule applies even if the credit allowed is less
than the reduction. For more information on this credit, see chapter
12 in Publication 535.
Deduction for clean-fuel vehicle and refueling property. If
you take the deduction for clean-fuel vehicles or clean-fuel vehicle
refueling property, decrease the basis of the property by the amount
taken. For more information about these deductions, see chapter 12 in
Publication 535.
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 13.
Postponed gain from sale of home. If you postponed gain from
the sale of your main home before May 7, 1997, you must reduce the basis
of your new home by the amount of the postponed gain. For more information
on the rules for the sale of a home, see Publication
523.
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:
Original cost of duplex |
$35,000 |
Addition to duplex |
10,000 |
Total cost of duplex |
$45,000 |
Minus: |
Depreciation |
23,000 |
Adjusted basis before casualty |
$22,000 |
Minus: |
Insurance proceeds |
$19,700 |
|
|
Deducted casualty loss |
1,000 |
|
|
Salvage proceeds |
1,300 |
22,000 |
Adjusted basis after casualty |
$ ---0--- |
Add: Cost of restoring duplex |
19,000 |
Adjusted basis after restoration |
$19,000 |
Your basis in the land is its original cost of $5,000.
Publication 17 | 2001 Tax Year Archives | Tax Help Archives | Home