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.
Your basis is the amount of
your investment in property for
tax purposes. Use the basis 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.
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.
If you make improvements to the
property, increase your basis.
If you take deductions for
depreciation or casualty losses,
reduce your basis.
Keep accurate records of
all items that affect your
basis. For more information on
keeping records, see chapter 1.
Useful Items - You
may want to see:
Publication
15-B
Employer's Tax Guide to
Fringe Benefits
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 you assume liability
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
(OID) 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.
Lump
sum purchase. If
you buy buildings and
the land on which they
stand for a lump sum,
allocate the cost basis
among the land and the
buildings so you can
figure the basis for
depreciation on the
buildings. Land is not
depreciable. Allocate
the cost basis according
to the respective fair
market values (FMVs) of
the land and buildings
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.
If you are not
certain of the FMVs of
the land and buildings,
you can allocate the
basis according to their
assessed values for real
estate tax purposes.
Fair market value (FMV).
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,
and both having
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 the
property 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.
Your basis includes
the settlement fees and
closing costs you paid
for buying the property.
(A fee for buying
property is a cost that
must be paid even if you
buy the property for
cash.) Do not 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 fees
for the title
search and
preparation of
the sales
contract and
deed).
Recording
fees.
Survey fees.
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.
Casualty
insurance
premiums.
Rent for
occupancy of the
property before
closing.
Charges for
utilities or
other services
related to
occupancy of the
property before
closing.
Charges
connected with
getting a loan,
such as points
(discount
points, loan
origination
fees), mortgage
insurance
premiums, loan
assumption fees,
cost of a credit
report, and fees
for an appraisal
required by a
lender.
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 an
expense.
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 25.
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.
Examples of items that
increase or reduce basis are
shown in Table 14-1. The
following discussions provide
information about many of these
items.
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 and the fees for
getting a reduction of an
assessment levied against
property.
Improvements.
Add to your basis in
property the cost of
improvements 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 to the basis of
property assessments for
improvements such as
streets and sidewalks if
they increase the value
of the property
assessed. Do not deduct
them as taxes. However,
you can deduct as taxes
assessments for
maintenance or repairs,
or for meeting interest
charges related to 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
Decrease the basis of any
property by all items that
represent a return of
capital for the period
during which you held the
property. These include the
items discussed below.
Table 14-1. Examples
of Adjustments to
Basis
Increases
to Basis
Decreases
to Basis
• Capital
improvements:
• Exclusion
from income
of
Putting an
addition on
your home
subsidies
for energy
conservation
Replacing an
entire roof
measures
Paving your
driveway
Installing
central air
conditioning
• Casualty
or theft
loss
deductions
Rewiring
your home
and
insurance
reimbursements
•
Assessments
for local
improvements:
• Credit for
qualified
electric
vehicles
Water
connections
Sidewalks
• Postponed
gain from
the sale of
a home
Roads
• Deduction
for
clean-fuel
vehicles
• Casualty
losses:
and
clean-fuel
vehicle
refueling
property
Restoring
damaged
property
•
Depreciation
and section
179
deduction
• Legal
fees:
Cost of
defending
and
perfecting a
title
• Nontaxable
corporate
distributions
Fees for
getting a
reduction of
an
assessment
• Certain
canceled
debt
excluded
from income
• Zoning
costs
• Easements
•
Adoption tax
benefits
Casualty and theft
losses.
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 (including any
special depreciation
allowance), 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
Your basis in the
land is its original
cost of $5,000.
Easements.
The amount you receive
for granting an easement
is generally considered
to be proceeds 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 deducted. 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 chapter 16.
Basis Other Than
Cost
There are many times when you
cannot use cost as basis. In
these cases, the fair market
value or the adjusted basis of
the property can be used. Fair
market value (FMV) and adjusted
basis were discussed earlier.
Property
Received for
Services
If you receive property
for your services, include
its 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.
Restricted property.
If you receive
property for your
services and the
property is subject to
certain restrictions,
your basis in the
property is its FMV when
it becomes substantially
vested. However, this
rule does not apply if
you make an election to
include in income the
FMV of the property at
the time it is
transferred to you, less
any amount you paid for
it. Property is
substantially vested
when it is transferable
or when it is not
subject to a substantial
risk of forfeiture (you
do not have a good
chance of losing it).
For more information,
see
Restricted Property
in
Publication 525.
Bargain purchases.
A bargain purchase is
a purchase of an item
for less than its FMV.
If, as compensation for
services, you buy goods
or other property at
less than FMV, include
the difference between
the purchase price and
the property's FMV in
your income. Your basis
in the property is its
FMV (your purchase price
plus the amount you
include in income).
If the difference
between your purchase
price and the FMV is a
qualified employee
discount, do not include
the difference in
income. However, your
basis in the property is
still its FMV. See
Employee Discounts
in
Publication 15-B.
Taxable
Exchanges
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. 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.
Involuntary
Conversions
If you receive
replacement property as a
result of an involuntary
conversion, such as a
casualty, theft, or
condemnation, figure the
basis of the replacement
property using the basis of
the converted property.
Similar
or related property.
If you receive
replacement property
similar or related in
service or use to the
converted property, the
replacement property's
basis is the same as the
converted property's
basis on the date of the
conversion, with the
following adjustments.
Decrease the
basis by the
following.
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.
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
conversion.
Example.
The state
condemned your
property. The
adjusted basis of
the property was
$26,000 and the
state paid you
$31,000 for it. You
realized a gain of
$5,000 ($31,000 -
$26,000). You bought
replacement property
similar in use to
the converted
property for
$29,000. You
recognize a gain of
$2,000 ($31,000 -
$29,000), the
unspent part of the
payment from the
state. Your
unrecognized gain is
$3,000, the
difference between
the $5,000 realized
gain and the $2,000
recognized gain. The
basis of the
replacement property
is figured as
follows:
Cost of
replacement
property
$29,000
Minus:
Gain not
recognized
3,000
Basis
of
replacement
property
$26,000
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
What Is the Basis of
Your Depreciable
Property? in
chapter 1 of Publication
946.
Nontaxable
Exchanges
A nontaxable exchange is
an exchange in which you are
not taxed on any gain and
you cannot deduct any loss.
If you receive property in a
nontaxable exchange, its
basis is generally the same
as the basis of the property
you transferred. See
Nontaxable Trades in chapter 15.
Like-Kind
Exchanges
The exchange of
property for the same
kind of property is the
most common type of
nontaxable exchange. To
qualify as a like-kind
exchange, the property
traded and the property
received must be both of
the following.
Qualifying
property.
Like-kind
property.
The basis of the
property you receive is
generally the same as
the adjusted basis of
the property you gave
up. If you trade
property in a like-kind
exchange and also pay
money, the basis of the
property received is the
adjusted basis of the
property you gave up
increased by the money
you paid.
Basis for
depreciation.
Special rules
apply in determining
and depreciating the
basis of MACRS
property acquired in
a like-kind
exchange. For
information, see
What Is the
Basis of Your
Depreciable
Property?
in chapter 1 of
Publication 946.
Qualifying property.
In a like-kind
exchange, you must
hold for investment
or for productive
use in your trade or
business both the
property you give up
and the property you
receive.
Like-kind property.
There must be an
exchange of
like-kind property.
Like-kind properties
are properties of
the same nature or
character, even if
they differ in grade
or quality. The
exchange of real
estate for real
estate and personal
property for similar
personal property
are exchanges of
like-kind property.
Example.
You trade in an
old truck used in
your business with
an adjusted basis of
$1,700 for a new one
costing $6,800. The
dealer allows you
$2,000 on the old
truck, and you pay
$4,800. This is a
like-kind exchange.
The basis of the new
truck is $6,500 (the
adjusted basis of
the old one, $1,700,
plus the amount you
paid, $4,800).
If you sell your
old truck to a third
party for $2,000
instead of trading
it in and then buy a
new one from the
dealer, you have a
taxable gain of $300
on the sale (the
$2,000 sale price
minus the $1,700
adjusted basis). The
basis of the new
truck is the price
you pay the dealer.
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.
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.
More information.
See
Like-Kind
Exchanges
in chapter 1 of
Publication 544 for
more information.
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 that
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.
If the property
transferred to you is a
series E, series EE, or
series I U.S. savings bond,
the transferor must include
in income the interest
accrued to the date of
transfer. Your basis in the
bond immediately after the
transfer is equal to the
transferor's basis increased
by the interest income
includible in the
transferor's income. For
more information on these
bonds, see chapter 8.
At the time of the
transfer, 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
about the transfer of
property from a spouse, see
chapter 15.
Property
Received as a
Gift
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 FMV at the time it
was given to you, and any
gift tax paid on it.
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
same as 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.
Example.
You received an
acre of land as a
gift. At the time of
the gift, the land
had an FMV of
$8,000. The donor's
adjusted basis was
$10,000. After you
received the
property, no events
occurred to increase
or decrease your
basis. If you later
sell the property
for $12,000, you
will have a $2,000
gain because you
must use the donor's
adjusted basis at
the time of the gift
($10,000) as your
basis to figure
gain. If you sell
the property for
$7,000, you will
have a $1,000 loss
because you must use
the FMV at the time
of the gift ($8,000)
as your basis to
figure loss.
If the sales
price is between
$8,000 and $10,000,
you have neither
gain nor loss.
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.
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 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, explained
later.
Also, for figuring
gain or loss from a sale
or other disposition 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.
Gift received before
1977. 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.
Gift received after
1976. If you
received a gift after
1976, increase your
basis in the gift (the
donor's adjusted 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 by
multiplying the gift tax
paid by a fraction. The
numerator of the
fraction 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 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 2004, 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
$39,000 ($50,000
minus the $11,000
annual exclusion).
She paid a gift tax
of $9,000 on the
property. Your basis
is $26,930, figured
as follows:
Fair
market
value
$50,000
Minus:
Adjusted
basis
-20,000
Net
increase
in value
$30,000
Gift tax
paid
$9,000
Multiplied
by
($30,000
÷
$39,000)
× .77
Gift tax
due to
net
increase
in value
$6,930
Adjusted
basis of
property
to your
mother
+20,000
Your
basis in
the
property
$26,930
Inherited
Property
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 value under
the special-use
valuation method for
real property used
in farming or a
closely held
business if elected
for estate tax
purposes.
The decedent's
adjusted basis in
land to the extent
of the value
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.
For more information, see
the instructions to Form
706, United States Estate
(and Generation-Skipping
Transfer) Tax Return.
Property
Changed to
Business or
Rental Use
If you hold property for
personal use and then change
it to business use or use it
to produce rent, you can
begin to depreciate the
property at the time of the
change. To do so, you must
figure its basis for
depreciation. An example of
changing property held for
personal use to business or
rental use would be renting
out your former personal
residence.
Basis
for depreciation.
The basis for
depreciation is the
lesser of the following
amounts.
The FMV of
the property on
the date of the
change.
Your
adjusted basis
on the date of
the change.
Example.
Several years
ago, you paid
$160,000 to have
your house built on
a lot that cost
$25,000. You paid
$20,000 for
permanent
improvements to the
house and claimed a
$2,000 casualty loss
deduction for damage
to the house before
changing the
property to rental
use last year.
Because land is not
depreciable, you
include only the
cost of the house
when figuring the
basis for
depreciation.
Your adjusted
basis in the house
when you changed its
use was $178,000
($160,000 + $20,000
- $2,000). On the
same date, your
property had an FMV
of $180,000, of
which $15,000 was
for the land and
$165,000 was for the
house. The basis for
figuring
depreciation on the
house is its FMV on
the date of the
change ($165,000)
because it is less
than your adjusted
basis ($178,000).
Sale of
property.
If you later sell or
dispose of property
changed to business or
rental use, the basis
you use will depend on
whether you are figuring
gain or loss.
Gain. The
basis for figuring a
gain is your adjusted
basis in the property
when you sell the
property.
Example.
Assume the same
facts as in the
previous example
except that you sell
the property at a
gain after being
allowed depreciation
deductions of
$37,500. Your
adjusted basis for
figuring gain is
$165,500 ($178,000 +
$25,000 (land) -
$37,500).
Loss. 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.
Example.
Assume the same
facts as in the
previous example,
except that you sell
the property at a
loss after being
allowed depreciation
deductions of
$37,500. In this
case, you would
start with the FMV
on the date of the
change to rental use
($180,000), because
it is less than the
adjusted basis of
$203,000 ($178,000 +
$25,000 (land)) on
that date. Reduce
that amount
($180,000) by the
depreciation
deductions
($37,500). The basis
for loss is $142,500
($180,000 -
$37,500).
Stocks and
Bonds
The basis of stocks or
bonds you buy generally is
the purchase price plus any
costs of purchase, such as
commissions and recording or
transfer fees. If you get
stocks or bonds other than
by purchase, your basis is
usually determined by the
FMV or the previous owner's
adjusted basis, as discussed
earlier.
You must adjust the basis
of stocks for certain events
that occur after purchase.
For example, if you receive
additional stock from
nontaxable stock dividends
or stock splits, reduce your
basis for each share of
stock by dividing the
adjusted basis of the old
stock by the number of
shares of old and new stock.
This rule applies only when
the additional stock
received is identical to the
stock held. Also reduce your
basis when you receive
nontaxable distributions.
They are a return of
capital.
Example.
In 2002 you bought
100 shares of XYZ stock
for $1,000 or $10 a
share. In 2003 you
bought 100 shares of XYZ
stock for $1,600 or $16
a share. In 2004 XYZ
declared a 2-for-1 stock
split. You now have 200
shares of stock with a
basis of $5 a share and
200 shares with a basis
of $8 a share.
Other
basis. There are
other ways to figure the
basis of stocks or bonds
depending on how you
acquired them. For
detailed information,
see
Stocks and Bonds
under
Basis of Investment
Property in
chapter 4 of Publication
550.
Identifying stocks or
bonds sold. If you
can adequately identify
the shares of stock or
the bonds you sold,
their basis is the cost
or other basis of the
particular shares of
stocks or bonds. If you
buy and sell securities
at various times in
varying quantities and
you cannot adequately
identify the shares you
sell, the basis of the
securities you sell is
the basis of the
securities you acquired
first. For more
information about
identifying securities
you sell, see
Stocks and Bonds
under
Basis of Investment
Property in
chapter 4 of Publication
550.
Mutual
fund shares.
If you sell mutual
fund shares you acquired
at various times and
prices and left on
deposit in an account
kept by a custodian or
agent, you can elect to
use an average basis.
For more information,
see
Average Basis
in Publication 564.
Bond
premium.
If you buy a taxable
bond at a premium and
elect to amortize the
premium, reduce the
basis of the bond by the
amortized premium you
deduct each year. See
Bond Premium
Amortization in chapter 3 of
Publication 550 for more
information. Although
you cannot deduct the
premium on a tax-exempt
bond, you must amortize
the premium each year
and reduce your basis in
the bond by the
amortized amount.
Original issue discount
(OID) on debt
instruments.
You must increase your
basis in an OID debt
instrument by the OID
you include in income
for that instrument. See
Original Issue
Discount (OID)
in chapter 8.
Tax-exempt obligations.OID on tax-exempt
obligations is generally
not taxable. However,
when you dispose of a
tax-exempt obligation
issued after September
3, 1982, and acquired
after March 1, 1984, you
must accrue OID on the
obligation to determine
its adjusted basis. The
accrued OID is added to
the basis of the
obligation to determine
your gain or loss. See
chapter 4 of Publication
550.
