Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. Home improvements costs are not deductible. However, you add the cost of improvements to the basis of your property.

Examples of 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, putting on a new roof, or paving your driveway.

For a list of some other examples of improvements, refer to Publication 523 (PDF), Selling Your Home.

Repairs maintain your home in good condition. They are not currently deductible nor do they add to your home's value or prolong its life. You do not add their cost to the basis of your property.

Some examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering and replacing broken window panes.

Exception: The entire job is considered an improvement, however, if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For more information, refer to Publication 523 (PDF); Selling Your Home; and Publication 551 (PDF), Basis of Assets.

References:

• Publication 523 (PDF), Selling Your Home
• Publication 551 (PDF), Basis of Assets

To figure the basis of property you get as a gift, you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value (FMV) at the time it was given to you. 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 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 a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property. See Adjusted Basis in Publication 551 (PDF), Basis of Assets.

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 a gain or loss on the sale or disposition of the property.

If the FMV 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. Also, for figuring gain or loss, you must increase or decrease your basis by any required adjustments to basis while you held the property. See Adjusted Basis in Publication 551, Basis of Assets.

If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. However, do not increase your basis above the FMV of the gift at the time it was given to you.

If you received a gift after 1976, increase your basis by the part of the gift tax paid on it that is due to the net increase in value of the gift. Figure the increase to basis by multiplying the gift tax paid by the following fraction. The numerator of the faction 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 less the donor's adjusted basis. The amount of the gift is its value for gift tax purposes, after reduction by any annual exclusion and any marital or charitable deduction that applies to the gift. For more information on the gift tax, please see Publication 950 (PDF), Introduction to Estate and Gift taxes.

References:

• Publication 551 (PDF), Basis of Assets
• Publication 950 (PDF), Introduction to Estate and Taxes

Basis is your investment in property for tax purposes. Before you can figure any gain or loss on a sale, exchange, or other disposition of property, or figure allowable depreciation, you must determine the adjusted basis. Adjusted basis is the result of increasing or decreasing your original basis according to certain events. Your original basis is usually your cost to acquire the asset.

Increases to basis include but are not limited to:

• Improvements
• Assessments for local improvements
• Sales tax
• The cost of extending utilities lines to the property
• Legal fees such as the cost of defending or perfecting title
• Zoning costs

Decreases to basis include but are not limited to:

• Depreciation
• Nontaxable corporate distributions
• Casualty and theft losses
• Easements
• Rebates from the manufacturer or seller

Additional information on basis can be found in Publication 551 (PDF), Basis of Assets, or Tax Topic 703, Basis of Assets.

References:

• Publication 551 (PDF), Basis of Assets
• Tax Topic 703, Basis of Assets

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 fair market value (FMV) at the time it was given to you, and any gift tax paid on it.

If the FMV of the property was less than the donor's adjusted basis, your basis for figuring gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustment to basis during the period you held the property. Your basis for figuring loss on its sale or other disposition is its FMV at the time you received the gift plus or minus any required adjustment to basis during the period you held the property.

If the FMV of the property was equal to or greater than the donor's adjusted basis, your basis for figuring gain or loss on its sale or other disposition is the same as 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.

For further complete information, refer to Publication 17 (PDF), chapter 14, Basis of Property.

References:

• Publication 17 (PDF), Your Federal Income Tax

Usually, when you trade stock in one corporation for stock in another as part of a merger or other qualifying reorganization, you have a nontaxable exchange. The basis of the stock you received is generally the same as the basis of the old stock, increased by any dividend treated as received or gain recognized on the exchange and decreased by the value of property or money received.

You may receive cash or something of value instead of a fractional share if the number of shares of new stock doesn't divide evenly into the number of shares of the old stock. You treat this as a sale of the fractional share.

Your basis in the new stock is determined, in whole or in part, by your basis in the old stock. Your holding period for the new stock will include the holding period for the old stock, provided that the old stock was held as a capital asset at the time of the exchange. For special basis rules relating to incentive stock options and options granted under employee stock purchase plan see Revenue Ruling 80-244, in IRS 1980-2 Cumulative Bulletin at page 235.

Refer to Publication 550 (PDF), Investment Income and Expenses.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

The basis of the old shares must be allocated to the old and new shares in proportion to the fair market value of each on the date of the split. Thus, you generally divide the adjusted basis of the old stock by the number of shares of old and new stock. The result is your new basis per share of stock. If the old shares were purchased in separate lots for differing amounts of money, the adjusted basis of the old stock must be allocated between the old and new stock on a lot by lot basis.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

Usually, the company issuing the new type of stock will send you a letter explaining the tax consequences of the stock distribution, including how to calculate the basis in the two different types of stock.

If you did not get such a letter or would like further assistance, call IRS customer service at 800-829-0922 or refer to Publication 550 (PDF), Investment Income and Expense: Stock dividends under Basis of Investment Property.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

You need to determine what your basis is in the company stock on the date of the split. The new shares assume part of your basis in the company stock on that date. You must divide the adjusted basis in the old stock by the number of shares of old and new stock. The result is your basis for each share of stock.

For example, if you owned two shares of company stock with a basis in one at $30 and the other $45, and the company declares a three for one stock split, you now have six shares of stock. Three of the shares will have a basis of $10, and three will have a basis of $15.

Because this is an Employee Stock Option Plan, you may have to report some or all of the gain on the sale of this stock as ordinary income (wages).

References:

• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

If you purchased the stocks, you need to be able to determine the purchase price to establish your basis when you sell them. If you cannot establish the basis of stocks sold, the basis of that stock is the basis of the stock you acquired first. Except for certain mutual fund shares, you cannot use an average price per share to figure the gain or loss on the sale of stock.

Refer to Stocks and Bonds under Basis of Investment Property in Chapter 4 of Publication 550 (PDF), Investment Income and Expenses. For information on the basis of inherited stock, refer to Inherited Property in the same section of Chapter 4, Publication 550 (PDF), Investment Income and Expenses.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

If you can identify which shares of stock you sold, your basis is what you paid for the shares sold (plus sales commissions). If you sell a block of the same kind of stock, you can report all the shares sold at the same time as one sale, writing VARIOUS in the "date acquired" column of Form 1040, Schedule D (PDF). However, what you enter into the "cost or other basis" column is the total of all the acquisition costs of the shares sold.

If you cannot adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is the basis of the shares you acquired first (first-in first-out). Except for certain mutual fund shares, you cannot use the average price per share to figure gain or loss on the sale of stock.

For more information, refer to Publication 550 (PDF), Investment Income and Expenses.

References:

• Publication 525 (PDF), Taxable and Nontaxable Income
• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 409, Capital gains and losses
• Form 1040, Schedule D (PDF)

The average basis method may be used only for mutual fund shares that were purchased at various times for various prices if the shares are left in the custody of a custodian or agent in an account maintained for the acquisition or redemption of the shares.

References:

• Publication 564 (PDF), Mutual Fund Distributions

The basis of the stock you sold is the cost of the shares plus any adjustments, such as sales commissions. If you have not kept detailed records of your dividend reinvestments, you may be able to reconstruct those records with the help of public records from sources such as the media, your broker, or the company that issued the dividends.

If you cannot specifically identify which shares were sold, you must use the first-in first-out rule. This means that you deem that you sold the oldest shares first, then the next oldest, then the next-to-the-next oldest, until you have accounted for the number of shares in the sale. In order to establish the basis of these shares, you need to have kept adequate documentation of all your purchases, including those that were through the dividend reinvestment plan. You may not use an average cost basis. Only mutual fund shares may have an average cost basis.

Refer to Publication 550 (PDF), Investment Income and Expenses, and Publication 551 (PDF), Basis of Assets.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Publication 551 (PDF), Basis of Assets
• Tax Topic 404, Dividends

Unless you sell all of your shares at one time, your total basis, which includes both your original purchase and any purchases through a dividend reinvestment, is not the figure used to report the sale of shares. If you sell less than all of your shares at one time, you need to have kept adequate documentation of all your purchases, including those that were through the dividend reinvestment plan in order to establish the basis of the shares sold. You may not use an average cost basis. Only mutual fund shares may have an average cost basis.

When reporting the sale of shares of stocks, the basis for the calculation of gain or loss is the actual cost (plus adjustments, such as sales commissions) of those shares. If you cannot specifically identify which of your shares were sold, you must use the first-in first-out rule.

For more information, refer to Publication 550 (PDF), Investment Income and Expenses, and Publication 551 (PDF), Basis of Assets.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Publication 551 (PDF), Basis of Assets
• Tax Topic 404, Dividends

After you report the dividends as income, you have basis in the shares acquired through dividend reinvestment. When you report the sale of the shares, you will be taxed only on the amount that the sales proceeds (minus commissions) exceed your cost basis (in this case, the amount of the dividends reinvested).

References:

• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 404, Dividends

Your starting basis is what you paid to buy the shares. This amount is increased by the compensation income amount, if any, you must declare on your income tax return when the stock is sold. Sales commissions can also increase the basis in your stock but will not affect the amount of compensation that must be declared.

Under the employee stock purchase plan rules, if you had an option to purchase the stock at a discount, the amount of compensation income realized when you sell the stock depends on whether holding periods are met and whether you purchased the stock at a discount.

To satisfy holding periods, you must hold on to the stock for at least one year after its transfer to you upon purchase and for two years after the option is granted. If either of these are not true, then you have not met the required holding periods.

If the holding periods are met, the compensation income is the lesser of:

• the amount by which the fair market value of the stock at the time you are granted the option exceeds the option price, or
• The amount by which the fair market value of the stock at the time you sell it exceeds what you paid for it.

If they are not met, the compensation income is the amount by which the fair market value of the stock, when vested, exceeds what you paid for it. The compensation income should be included as wages on your Form W-2.

For more information, refer to Publication 525 (PDF), Taxable and Non-Taxable Income.

References:

• Publication 525 (PDF), Taxable and Nontaxable Income
• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

A taxpayer generally must include in alternative minimum taxable income the amount by which the price he paid for stock received pursuant to the exercise of an incentive stock option is exceeded by the stock's fair market value at the time his rights to the stock are freely transferable or are not subject to a substantial risk of forfeiture.

Increase your alternative minimum tax basis by the amount of the adjustment. Your basis for regular tax is not affected by the adjustment.

If a taxpayer acquires stock pursuant to the exercise of an ISO and disposes of the stock in a disqualifying disposition in the same taxable year, the transaction is subject to regular tax, and the alternative minimum tax does not apply. Refer to Internal Revenue Code 83, Internal Revenue Code 56(b)(3), and Internal Revenue Code 422(c)(2). For more information, refer to Instructions for Form 6251, Alternative Minimum Tax- Individuals.

References:

• Instructions for Form 6251, Alternative Minimum Tax- Individuals
• Internal Revenue Code 83
• Internal Revenue Code 56(b)(3)
• Internal Revenue Code 422(c)(2)

You need to reconstruct your records the best that you can. Contact your broker or the mutual fund company for assistance.

Another source of information is your prior year tax returns. If your mutual fund has been reinvesting dividends, those reinvested dividends (which have been used to purchase additional shares in the fund) should have been reported as dividend income on your tax return each year. To compute your total basis, add to the cost of the original shares purchased the amount of all dividends automatically reinvested that were previously reported as income on your prior tax returns and any shares you subsequently purchased.

You can usually also add acquisition fees and load charges you've paid to your basis in your mutual fund shares. If you sell your shares and the sales commission is not subtracted from the sales proceeds on Form 1099-B, Broker and Barter Exchanges, you can add the commission to the basis of the shares sold. If you receive a distribution that is identified as a return of capital, you must reduce your total basis by that amount.

Refer to Keeping Track of Your Basis in Publication 564 (PDF), Mutual Fund Distributions.

References:

• Publication 564 (PDF), Mutual Fund Distributions

Unless you have acquired shares through gifts or inheritances, your basis is what the shares cost you. Your mutual fund company can often provide you with this information upon request. Another source of information is your broker, if the fund was purchased through a broker. You cannot calculate your basis in your mutual fund shares accurately without this information. You can only claim the amount of basis that you can establish and substantiate with records. You may lose a large part of your basis if you cannot establish the amount of dividends that were reinvested. This is why keeping records is so important.

Another source of information on reinvested dividends is your prior year tax returns. If your mutual fund has been reinvesting dividends, those reinvested dividends should have been reported as dividend income on your tax return each year.

For more information, refer to Publication 564 (PDF), Mutual Fund Distributions.

References:

• Publication 564 (PDF), Mutual Fund Distributions

They would affect your total basis and total number of shares if they were reinvested in the mutual fund. Add the reinvested dividends and capital gains that you have reported as income on your tax return to your total basis. You will also own additional shares in the fund because the dividends and capital gains have been used to purchase shares. Keep good records. If you are going to be using an average basis method to determine per-share basis on sales, be sure and keep records of all your mutual fund activity until you no longer own any shares in that fund.

There is a worksheet to help you keep track of your number of shares and your basis in Publication 564 (PDF), Mutual Fund Distributions.

References:

• Publication 564 (PDF), Mutual Fund Distributions

A return of principal (or return of capital) reduces your basis in your mutual fund shares. Unlike a dividend or a capital gain distribution, a return of capital is a return of part of your investment (cost). However, basis cannot be reduced below zero. Once your basis reaches zero, any return of principal is capital gain and must be reported on Form 1040 Schedule D (PDF), Capital Gains and Losses.

References:

• Publication 564 (PDF), Mutual Fund Distributions

You are referring to meeting the requirement for "adequate identification." If you can definitively identify the shares sold, you do not need to use the adequate identification rules. You can use the adjusted basis of those particular shares to figure your gain or loss.

The "adequate identification" rules allow you to control which shares are considered sold, even though you may not control which shares are actually sold. If you specify to your broker which shares you want sold prior to or at the time of the sale and they confirm within a reasonable time in writing, then you are considered to be able to "adequately identify" the shares sold, even if the broker actually sells different shares. The confirmation by the mutual fund must be given to you within a reasonable period of time and state that you instructed the broker to sell particular shares.

If you cannot identify the specific shares and you do not want to use an average basis, then you must use the first-in first-out method (FIFO). These two methods are both cost basis methods. You may not use either cost basis method if you have previously used an average basis method for that mutual fund on a tax return. Refer to Publication 564 (PDF), Mutual Fund Distributions.

References:

• Publication 564 (PDF), Mutual Fund Distributions

No. If you subsequently sell some shares in that mutual fund and can identify the shares sold, you can switch to the specific share identification method. Both of these methods are cost basis methods.

To switch to an average basis method, you must have acquired the shares at various times and prices, and left the shares on deposit in an account handled by a custodian or agent who acquires or redeems those shares. Once you elect to use an average basis method, you must continue to use it for all accounts in the same fund. However, you may use a different method for shares in other funds, even those within the same family of funds.

Before using an average basis, be sure your records reflect the disposition of the shares that were reported using the cost basis method (FIFO).

References:

• Publication 564 (PDF), Mutual Fund Distributions

If a stock within your mutual fund splits, it has no affect on your basis because the shares you own are shares in the mutual fund, not in the stock that split.

References:

• Publication 564 (PDF), Mutual Fund Distributions

You do not need permission to elect an average basis method for a particular mutual fund when you have used a cost basis previously to report the sale of shares in the fund. If you meet the conditions to use an average basis, then you just need to clearly indicate on the return for which you want the election to be in effect that you are making the election. You also need to indicate which average basis method you are using and that none of the shares are gift shares. If there are gift shares in the account and the fair market value of the shares at the time of the gift was not more than the donor's basis, you must include a statement that the basis for gift shares when figuring the average basis is the fair market value at the time of the gift.

If you have already reported the sale using a cost basis, you cannot make this election unless you can do it on an amended return before the due date of the tax return being amended.

However, you do need the consent of the IRS to use a cost basis or to change your average basis method once you have made this election to use an average basis method. This would be considered a change in an accounting method. You would need to request consent to change your method on Form 3115 (PDF), Application for Change in Accounting Method.

For more information, refer to Publication 564 (PDF), Mutual Fund Distributions, Publication 538 (PDF), Accounting Periods and Methods, Instructions for Form 3115, Application for Change in Accounting Method, Revenue Procedure 97-27, and Section 9.03 of Revenue Procedure 2002-1.

References:

• Publication 538 (PDF), Accounting Periods and Methods
• Publication 564 (PDF), Mutual Fund Distributions
• Form 3115 (PDF), Application for Change in Accounting Method
• Instructions for Form 3115, Application for Change in Accounting Method

If you own securities and they become totally worthless, you can take a deduction for a loss, but not for a bad debt.

The worthless securities are treated as though they were capital assets sold on the last day of the tax year if they were capital assets in your hands. Report worthless securities on line 1 or line 8 of Form 1040, Schedule D (PDF), whichever applies. In columns (c) and (d), write "Worthless." For additional information, refer to Publication 550 (PDF), Investment Income and Expenses (Including Capital Gains and Losses). For more information on bad debts, refer to Tax Topic 453, Bad Debt Deduction.

References:

• Publication 550 (PDF), Investment Income and Expenses (Including Capital Gains and Losses)
• Form 1040, Schedule D (PDF), Capital Gains and Losses
• Tax Topic 453, Bad Debt Deduction

If you have qualified business use of your home and enough gross income from that business use to that entitle you to a depreciation deduction, you are required to reduce your basis in the home by the amount of depreciation allowed (deducted) or allowable (could have been deducted).

Whether you choose to deduct the depreciation on your current return(s) will not matter. For tax purposes, you will still be treated as if you had taken the allowable deduction, and your basis will have to be reduced. For more information, refer to Publication 946 (PDF), How to Depreciate Property, Publication 544 (PDF), Sales and Other Dispositions of Assets, and Publication 587 (PDF), Business Use of Your Home.

References:

• Publication 946 (PDF), How to Depreciate Property
• Publication 544 (PDF), Sales and other Dispositions of Assets
• Publication 587 (PDF), Business Use of Your Home

When reporting the sale of or computing gain or loss on rental property, you are required to make an adjustment to your basis for allowable depreciation regardless of whether the deduction was taken. For more information refer to Publication 544 (PDF), Sale or Other Dispositions of Assets, and the Instructions for Form 4797, Sales of Business Property.

If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting Method, to claim the depreciation that should have been taken. The Form 3115 must be timely filed for the same tax year in which you sell the rental property or an earlier tax year. If you placed in service the rental property only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to take deductions for the claimed depreciation.

References:

• Publication 544 (PDF), Sale or Other Dispositions of Assets
• Form 1040X (PDF), Amended U.S. Individual Income Tax Return
• Form 3115 (PDF), Application for Change in Accounting Method
• Instructions for Form 3115, Application for Accounting Method
• Instructions for Form 4797, Sales of Business Property
• Publication 527 (PDF), Residential Rental Property (including Vacation Homes)

The answer depends on in which state you live in. Generally, the basis of property you inherit is its Fair Market Value (FMV) at the date of the decedent's death. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), and inherit your spouse's interest in a property held as community property, then the basis for the entire property becomes the FMV at the date of your spouse's death. This also assumes that at least half the value of the community property interest is included in the deceased spouse's gross estate. In other states, where the property is owned by you and your spouse as joint tenants, tenants by the entireties, or tenants-in-common, the basis of the one-half that your spouse owned would be increased to one-half of the FMV of the property at the date of death. The basis in the one-half that you owned would remain at the one-half of the pre-death adjusted basis. The new adjusted basis is, naturally, subject to all future routine basis adjustments until the property is either sold or otherwise disposed of.

References:

• Publication 551 (PDF), Basis of Assets
• Publication 559 (PDF), Survivors, Executors, and Administrators
• Publication 555 (PDF), Community Property

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