Transporting school children.   Do not include in your income a school board mileage allowance for taking children to and from school if you are not in the business of taking children to school. You cannot deduct expenses for providing this transportation.

Union benefits and dues.   Amounts deducted from your pay for union dues, assessments, contributions, or other payments to a union cannot be excluded from your income.

You may be able to deduct some of these payments as a miscellaneous deduction subject to the 2% limit if they are related to your job and if you itemize your deductions on Schedule A (Form 1040). For more information, see Union Dues and Expenses in chapter 30.

Strike and lockout benefits.   Benefits paid to you by a union as strike or lockout benefits, including both cash and the fair market value of other property, are usually included in your income as compensation. You can exclude these benefits from your income only when the facts clearly show that the union intended them as gifts to you.

Utility rebates.   If you are a customer of an electric utility company and you participate in the utility's energy conservation program, you may receive on your monthly electric bill either:

• A reduction in the purchase price of electricity furnished to you (rate reduction), or
• A nonrefundable credit against the purchase price of the electricity.

The amount of the rate reduction or nonrefundable credit is not included in your income.

Gains and Losses

The four chapters in this part discuss investment gains and losses, including how to figure your basis in property. A gain from selling or trading stocks, bonds, or other investment property may be taxed or it may be tax free, at least in part. A loss may or may not be deductible. These chapters also discuss gains from selling property you personally use - including the special rules for selling your home. Nonbusiness casualty and theft losses are discussed in chapter 27 in Part Five.

Basis of Property

Introduction

This chapter discusses how to figure your basis in property. It is divided into the following sections.

• Cost basis.
• Adjusted basis.
• Basis other than cost.

Basis is the amount of your investment in property for tax purposes. Use the basis of property 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. You must keep accurate records of all items that affect the basis of property so you can make these computations.

If you use property for both business and personal purposes, you must allocate the basis based on the use. Only the basis allocated to the business use of the property can be depreciated.

Your original basis in property is adjusted (increased or decreased) by certain events. If you make improvements to the property, increase your basis. If you take deductions for depreciation or casualty losses, reduce your basis.

Useful Items You may want to see:

Publication

• 15-B   Employer's Tax Guide to Fringe Benefits
• 523   Selling Your Home
• 525   Taxable and Nontaxable Income
• 535   Business Expenses
• 537   Installment Sales
• 544   Sales and Other Dispositions of Assets
• 550   Investment Income and Expenses
• 551   Basis of Assets
• 564   Mutual Fund Distributions
• 946   How To Depreciate Property

Cost Basis

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.

• Sales tax.
• Freight.
• Installation and testing.
• Excise taxes.
• Legal and accounting fees (when they must be capitalized).
• Revenue stamps.
• Recording fees.
• Real estate taxes (if assumed 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 in Publication 537.

Real Property

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.

If you buy buildings and the land on which they stand for a lump sum, allocate the basis among the land and the buildings so you can figure the allowable depreciation on the buildings. Land is not depreciable. Allocate the cost according to the fair market values of the land and buildings at the time of purchase.

Fair market value (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, who both have 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 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.   You can include in the basis of property you buy the settlement fees and closing costs for buying the property. (A fee for buying property is a cost that must be paid even if you buy the property for cash.) You cannot 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.

• Abstract fees (abstract of title fees).
• Charges for installing utility services.
• Legal fees (including title search and preparation of the sales contract and deed).
• Recording fees.
• Surveys.
• Transfer taxes.
• Owner's title insurance.
• 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.

1. Fire insurance premiums.
2. Rent for occupancy of the property before closing.
3. Charges for utilities or other services related to occupancy of the property before closing.
4. Charges connected with getting a loan. The following are examples of these charges.
   1. Points (discount points, loan origination fees).
   2. Mortgage insurance premiums.
   3. Loan assumption fees.
   4. Cost of a credit report.
   5. Fees for an appraisal required by a lender.
5. 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 taxes.

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 Points in chapter 5 of Publication 535.

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. For more information, see Points in chapter 25.

Adjusted Basis

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 from a manufacturer or seller.
• Easements.
• Gas-guzzler tax.
• Adoption tax benefits.
• Credit for employer-provided child care.

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 Casualty losses: Restoring damaged property Legal fees: Cost of defending and perfecting a title Zoning costs	Exclusion from income of subsidies for energy conservation measures. Casualty or theft loss deductions and insurance reimbursements Credit for qualified electric vehicles Section 179 deduction Depreciation 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 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 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.

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.

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

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.

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 maximum credit allowable even if the credit allowed is less than that maximum amount. For 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 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 Publication 523.

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