| Publication 225, Farmer's Tax Guide |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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:
-
Cost basis
-
Adjusted basis
-
Basis other than cost
Useful Items - You may want to see:
See chapter 17 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. You cannot deduct them as an expense.
If you reimburse the seller for taxes the seller paid for you, you usually can 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.
Settlement costs.
Your basis includes the settlement fees and closing costs for buying the property. See Publication 551 for a list
of items you can 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. Generally, you deduct the points 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).
-
Employee wages paid for the construction work, reduced by any employment credits allowed.
-
Depreciation on equipment you own while it is used in the construction.
-
Operating and maintenance costs for equipment used in the construction.
-
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:
-
Produce real or tangible personal property, or
-
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:
-
A fruit, nut, or other crop-bearing tree;
-
An ornamental tree;
-
A vine;
-
A bush;
-
Sod; and
-
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:
-
Any animal,
-
Any plant with a preproductive period of 2 years or less, or
-
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. |
-
Almonds
-
Apples
-
Apricots
-
Avocados
-
Blackberries
-
Blueberries
-
Cherries
-
Chestnuts
-
Coffee beans
|
-
Currants
-
Dates
-
Figs
-
Grapefruit
-
Grapes
-
Guavas
-
Kiwifruit
-
Kumquats
-
Lemons
-
Limes
|
-
Macadamia nuts
-
Mangoes
-
Nectarines
-
Olives
-
Oranges
-
Papayas
-
Peaches
-
Pears
-
Pecans
|
-
Persimmons
-
Pistachio nuts
-
Plums
-
Pomegranates
-
Prunes
-
Raspberries
-
Tangelos
-
Tangerines
-
Tangors
-
Walnuts
|
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.
-
The cost of extending utility service lines to property.
-
Legal fees, such as the cost of defending and perfecting title.
-
Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements.
-
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.
-
Section 179 deduction.
-
Deductions previously allowed or allowable for amortization, depreciation, and depletion.
-
Special depreciation allowance on qualified property.
-
Alternative motor vehicle credit. See Form 8910.
-
Alternative fuel vehicle refueling property credit. See Form 8911.
-
Residential energy credits. See Form 5695.
-
Investment credit (part or all) taken.
-
Casualty and theft losses and insurance reimbursements.
-
Payments you receive for granting an easement.
-
Exclusion from income of subsidies for energy conservation measures.
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Credit for qualified electric vehicles. See Form 8834.
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Certain canceled debt excluded from income.
-
Rebates from a manufacturer or seller.
-
Patronage dividends received from a cooperative association as a result of a purchase of property. See Patronage Dividends in
chapter 3.
-
Gas-guzzler tax. See Form 6197.
Some of these items are discussed next. For a more detailed list of items that decrease basis, see 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 below. 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.
Special depreciation allowance.
Decrease the basis of property by any special depreciation allowance for qualified property. Do not decrease the basis
if you made the election not
to claim any special allowance.
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 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.
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 right-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.
-
Debt canceled in a bankruptcy case or when you are insolvent.
-
Qualified farm debt.
-
Qualified real property business debt (provided you are not a C corporation).
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, see chapter 3. For more information about qualified real property business debt,
see Publication 334, Tax
Guide for Small Business.
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.
-
Decrease the basis by the following amounts.
-
Any loss you recognize on the involuntary conversion.
-
Any money you receive that you do not spend on similar property.
-
Increase the basis by the following amounts.
-
Any gain you recognize on the involuntary conversion.
-
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.
Example.
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.
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.
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 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.
-
Decrease the basis by the following amounts.
-
Any money you receive.
-
Any loss you recognize on the exchange.
-
Increase the basis by the following amounts.
-
Any additional costs you incur.
-
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.
|
Basis of land traded
|
$10,000
|
|
Minus: Cash received (adjustment 1(a))
|
- 3,000
|
| |
$7,000
|
|
Plus: Gain recognized (adjustment 2(b))
|
+ 3,000
|
| Basis of land received |
$10,000 |
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.
|
Adjusted basis of truck traded
|
$22,750
|
|
Minus: Cash received (adjustment 1(a))
|
-10,000
|
| |
$12,750
|
|
Plus: Gain recognized (adjustment 2(b))
|
+ 7,250
|
| Basis of truck received |
$20,000 |
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.
|
Adjusted basis of old tractor
|
$15,000
|
|
Minus: Cash received (adjustment 1(a))
|
- 1,000
|
| |
$14,000
|
|
Plus: Gain recognized (adjustment 2(b))
|
+ 1,500
|
| Total basis of properties received |
$15,500 |
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 2006, 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 $9,000. Your basis, $27,110,
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.
-
The FMV of the property at the date of the decedent's death.
-
The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation.
-
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. See Form 706-A and its instructions for more information on this tax.
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, a statement that:
-
Contains your (and the estate's) name, address, and taxpayer identification number;
-
Identifies the election as an election under section 1016(c) of the Internal Revenue Code;
-
Specifies the property for which you are making the election; and
-
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,
United States Additional Estate
Tax Return, 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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