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Free efile Internal Revenue Bulletin:  2013-12  March 18, 2013  Rev. Free efile Proc. Free efile 2013-21 Table of Contents SECTION 1. Free efile PURPOSE SECTION 2. Free efile BACKGROUND SECTION 3. Free efile SCOPE SECTION 4. Free efile APPLICATION. Free efile 01 Limitations on Depreciation Deductions for Certain Automobiles. Free efile . Free efile 02 Inclusions in Income of Lessees of Passenger Automobiles. Free efile SECTION 5. Free efile EFFECTIVE DATE SECTION 6. Free efile DRAFTING INFORMATION SECTION 1. Free efile PURPOSE This revenue procedure provides: (1) limitations on depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar year 2013, including separate tables of limitations on depreciation deductions for trucks and vans; and (2) the amounts that must be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2013, including a separate table of inclusion amounts for lessees of trucks and vans. Free efile The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by § 280F(d)(7) of the Internal Revenue Code. Free efile SECTION 2. Free efile BACKGROUND . Free efile 01 For owners of passenger automobiles, § 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. Free efile For passenger automobiles placed in service after 1988, § 280F(d)(7) requires the Internal Revenue Service to increase the amounts allowable as depreciation deductions by a price inflation adjustment amount. Free efile The method of calculating this price inflation amount for trucks and vans placed in service in or after calendar year 2003 uses a different CPI “automobile component” (the “new trucks” component) than that used in the price inflation amount calculation for other passenger automobiles (the “new cars” component), resulting in somewhat higher depreciation deductions for trucks and vans. Free efile This change reflects the higher rate of price inflation for trucks and vans since 1988. Free efile . Free efile 02 Section 331(a) of the American Taxpayer Relief Act of 2012, Pub. Free efile L. Free efile No. Free efile 112-240, 126 Stat. Free efile 2313 (Jan. Free efile 2, 2013) (the “Act”) extended the 50 percent additional first year depreciation deduction under § 168(k) to qualified property acquired by the taxpayer after December 31, 2007, and before January 1, 2014, if no written binding contract for the acquisition of the property existed before January 1, 2008, and if the taxpayer places the property in service generally before January 1, 2014. Free efile Section 168(k)(2)(F)(i) increases the first year depreciation allowed under § 280F(a)(1)(A)(i) by $8,000 for passenger automobiles to which the additional first year depreciation deduction under § 168(k) (hereinafter, referred to as “§ 168(k) additional first year depreciation deduction”) applies. Free efile . Free efile 03 Section 168(k)(2)(D)(i) provides that the § 168(k) additional first year depreciation deduction does not apply to any property required to be depreciated under the alternative depreciation system of § 168(g), including property described in § 280F(b)(1). Free efile Section 168(k)(2)(D)(iii) permits a taxpayer to elect out of the § 168(k) additional first year depreciation deduction for any class of property. Free efile Section 168(k)(4), as amended by the Act, permits a corporation to elect to increase the alternative minimum tax (“AMT”) credit limitation under § 53(c), instead of claiming the § 168(k) additional first year depreciation deduction for all eligible qualified property placed in service after December 31, 2012, that is round 3 extension property (as defined in § 168(k)(4)(J)(iv)). Free efile Accordingly, this revenue procedure provides tables for passenger automobiles for which the § 168(k) additional first year depreciation deduction applies. Free efile This revenue procedure also provides tables for passenger automobiles for which the § 168(k) additional first year depreciation deduction does not apply, either because taxpayer: (1) purchased the passenger automobile used; (2) did not use the passenger automobile during 2013 more than 50 percent for business purposes; (3) elected out of the § 168(k) additional first year depreciation deduction pursuant to § 168(k)(2)(D)(iii); or (4) elected to increase the § 53 AMT credit limitation in lieu of claiming § 168(k) additional first year depreciation. Free efile . Free efile 04 Section 280F(c) requires a reduction in the deduction allowed to the lessee of a leased passenger automobile. Free efile The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. Free efile Under § 1. Free efile 280F-7(a) of the Income Tax Regulations, this reduction requires a lessee to include in gross income an amount determined by applying a formula to the amount obtained from a table. Free efile One table applies to lessees of trucks and vans and another table applies to all other passenger automobiles. Free efile Each table shows inclusion amounts for a range of fair market values for each taxable year after the passenger automobile is first leased. Free efile SECTION 3. Free efile SCOPE . Free efile 01 The limitations on depreciation deductions in section 4. Free efile 01(2) of this revenue procedure apply to passenger automobiles (other than leased passenger automobiles) that are placed in service by the taxpayer in calendar year 2013, and continue to apply for each taxable year that the passenger automobile remains in service. Free efile . Free efile 02 The tables in section 4. Free efile 02 of this revenue procedure apply to leased passenger automobiles for which the lease term begins during calendar year 2013. Free efile Lessees of these passenger automobiles must use these tables to determine the inclusion amount for each taxable year during which the passenger automobile is leased. Free efile See Rev. Free efile Proc. Free efile 2008-22, 2008-1 C. Free efile B. Free efile 658, for passenger automobiles first leased during calendar year 2008; Rev. Free efile Proc. Free efile 2009-24, 2009-17 I. Free efile R. Free efile B. Free efile 885, for passenger automobiles first leased during calendar year 2009; Rev. Free efile Proc. Free efile 2010-18, 2010-09 I. Free efile R. Free efile B. Free efile 427, as amplified and modified by section 4. Free efile 03 of Rev. Free efile Proc. Free efile 2011-21, 2011-12 I. Free efile R. Free efile B. Free efile 560, for passenger automobiles first leased during calendar year 2010; Rev. Free efile Proc. Free efile 2011-21, for passenger automobiles first leased during calendar year 2011; and Rev. Free efile Proc. Free efile 2012-23, 2012-14 I. Free efile R. Free efile B. Free efile 712, for passenger automobiles first leased during calendar year 2012. Free efile SECTION 4. Free efile APPLICATION . Free efile 01 Limitations on Depreciation Deductions for Certain Automobiles. Free efile (1) Amount of the inflation adjustment. Free efile (a) Passenger automobiles (other than trucks or vans). Free efile Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. Free efile Section 280F(d)(7)(B)(ii) defines the term “CPI automobile component” as the automobile component of the Consumer Price Index for all Urban Consumers published by the Department of Labor. Free efile The new car component of the CPI was 115. Free efile 2 for October 1987 and 143. Free efile 787 for October 2012. Free efile The October 2012 index exceeded the October 1987 index by 28. Free efile 587. Free efile Therefore, the automobile price inflation adjustment for 2013 for passenger automobiles (other than trucks and vans) is 24. Free efile 8 percent (28. Free efile 587/115. Free efile 2 x 100%). Free efile The dollar limitations in § 280F(a) are multiplied by a factor of 0. Free efile 248, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to passenger automobiles (other than trucks and vans) for calendar year 2013. Free efile This adjustment applies to all passenger automobiles (other than trucks and vans) that are first placed in service in calendar year 2013. Free efile (b) Trucks and vans. Free efile To determine the dollar limitations for trucks and vans first placed in service during calendar year 2013, the Service uses the new truck component of the CPI instead of the new car component. Free efile The new truck component of the CPI was 112. Free efile 4 for October 1987 and 149. Free efile 386 for October 2012. Free efile The October 2012 index exceeded the October 1987 index by 36. Free efile 986. Free efile Therefore, the automobile price inflation adjustment for 2013 for trucks and vans is 32. Free efile 9 percent (36. Free efile 986/112. Free efile 4 x 100%). Free efile The dollar limitations in § 280F(a) are multiplied by a factor of 0. Free efile 329, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations for trucks and vans. Free efile This adjustment applies to all trucks and vans that are first placed in service in calendar year 2013. Free efile (2) Amount of the limitation. Free efile Tables 1 through 4 contain the dollar amount of the depreciation limitation for each taxable year for passenger automobiles a taxpayer places in service in calendar year 2013. Free efile Use Table 1 for a passenger automobile (other than a truck or van), and Table 2 for a truck or van, placed in service in calendar year 2013 for which the § 168(k) additional first year depreciation deduction applies. Free efile Use Table 3 for a passenger automobile (other than a truck or van), and Table 4 for a truck or van, placed in service in calendar year 2013 for which the § 168(k) additional first year depreciation deduction does not apply. Free efile REV. Free efile PROC. Free efile 2013-21 TABLE 1 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) PLACED IN SERVICE IN CALENDAR YEAR 2013 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $11,160 2nd Tax Year $5,100 3rd Tax Year $3,050 Each Succeeding Year $1,875 REV. Free efile PROC. Free efile 2013-21 TABLE 2 DEPRECIATION LIMITATIONS FOR TRUCKS AND VANS PLACED IN SERVICE IN CALENDAR YEAR 2013 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $11,360 2nd Tax Year $5,400 3rd Tax Year $3,250 Each Succeeding Year $1,975 REV. Free efile PROC. Free efile 2013-21 TABLE 3 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) PLACED IN SERVICE IN CALENDAR YEAR 2013 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION DOES NOT APPLY Tax Year Amount 1st Tax Year $3,160 2nd Tax Year $5,100 3rd Tax Year $3,050 Each Succeeding Year $1,875 REV. Free efile PROC. Free efile 2013-21 TABLE 4 DEPRECIATION LIMITATIONS FOR TRUCKS AND VANS PLACED IN SERVICE IN CALENDAR YEAR 2013 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION DOES NOT APPLY Tax Year Amount 1st Tax Year $3,360 2nd Tax Year $5,400 3rd Tax Year $3,250 Each Succeeding Year $1,975 . Free efile 02 Inclusions in Income of Lessees of Passenger Automobiles. Free efile A taxpayer must follow the procedures in § 1. Free efile 280F-7(a) for determining the inclusion amounts for passenger automobiles first leased in calendar year 2013. Free efile In applying these procedures, lessees of passenger automobiles other than trucks and vans should use Table 5 of this revenue procedure, while lessees of trucks and vans should use Table 6 of this revenue procedure. Free efile REV. Free efile PROC. Free efile 2013-21 TABLE 5 DOLLAR AMOUNTS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2013 Fair Market Value of Passenger Automobile Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & later $19,000 $19,500 2 4 6 7 8 19,500 20,000 2 5 6 9 9 20,000 20,500 2 5 8 9 11 20,500 21,000 3 6 8 10 12 21,000 21,500 3 6 10 11 13 21,500 22,000 3 7 10 13 14 22,000 23,000 4 8 11 14 16 23,000 24,000 4 9 14 16 18 24,000 25,000 5 10 15 18 21 25,000 26,000 5 12 16 21 23 26,000 27,000 6 12 19 23 25 27,000 28,000 6 14 20 25 28 28,000 29,000 7 15 22 27 30 29,000 30,000 7 16 24 29 33 30,000 31,000 8 17 26 31 35 31,000 32,000 8 19 27 33 38 32,000 33,000 9 20 29 35 40 33,000 34,000 10 21 31 37 43 34,000 35,000 10 22 33 39 45 35,000 36,000 11 23 35 41 48 36,000 37,000 11 25 36 43 50 37,000 38,000 12 26 38 45 53 38,000 39,000 12 27 40 47 55 39,000 40,000 13 28 42 49 58 40,000 41,000 13 29 44 52 59 41,000 42,000 14 30 45 54 63 42,000 43,000 14 32 47 56 64 43,000 44,000 15 33 48 59 67 44,000 45,000 15 34 51 60 69 45,000 46,000 16 35 52 63 72 46,000 47,000 17 36 54 65 74 47,000 48,000 17 38 55 67 77 48,000 49,000 18 39 57 69 79 49,000 50,000 18 40 59 71 82 50,000 51,000 19 41 61 73 84 51,000 52,000 19 42 63 75 87 52,000 53,000 20 43 65 77 89 53,000 54,000 20 45 66 79 92 54,000 55,000 21 46 68 81 94 55,000 56,000 21 47 70 84 96 56,000 57,000 22 48 72 85 99 57,000 58,000 22 50 73 88 101 58,000 59,000 23 51 75 90 103 59,000 60,000 24 52 76 92 106 60,000 62,000 24 54 79 95 110 62,000 64,000 25 56 83 99 115 64,000 66,000 27 58 87 103 120 66,000 68,000 28 60 90 108 125 68,000 70,000 29 63 93 112 130 70,000 72,000 30 65 97 117 134 72,000 74,000 31 68 100 121 139 74,000 76,000 32 70 104 125 144 76,000 78,000 33 73 107 129 149 78,000 80,000 34 75 111 133 154 80,000 85,000 36 79 117 141 162 85,000 90,000 39 85 126 151 174 90,000 95,000 41 91 135 162 186 95,000 100,000 44 97 144 172 199 100,000 110,000 48 106 157 188 217 110,000 120,000 53 118 174 210 241 120,000 130,000 59 129 193 230 266 130,000 140,000 64 141 210 252 290 140,000 150,000 70 153 227 273 315 150,000 160,000 75 165 245 294 339 160,000 170,000 80 177 263 315 363 170,000 180,000 86 189 280 336 388 180,000 190,000 91 201 298 357 412 190,000 200,000 97 212 316 378 436 200,000 210,000 102 224 333 400 461 210,000 220,000 107 236 351 420 486 220,000 230,000 113 248 368 442 509 230,000 240,000 118 260 386 463 534 240,000 And up 124 272 403 484 558 REV. Free efile PROC. Free efile 2013-21 TABLE 6 DOLLAR AMOUNTS FOR TRUCKS AND VANS WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2013 Fair Market Value of Truck or Van Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & later $19,000 $19,500 1 3 4 5 6 19,500 20,000 2 3 5 6 7 20,000 20,500 2 4 6 7 8 20,500 21,000 2 5 7 8 9 21,000 21,500 2 5 8 9 11 21,500 22,000 3 6 8 10 12 22,000 23,000 3 7 10 11 14 23,000 24,000 4 8 11 14 16 24,000 25,000 4 9 14 16 18 25,000 26,000 5 10 15 18 21 26,000 27,000 5 12 17 20 23 27,000 28,000 6 13 18 23 25 28,000 29,000 6 14 20 25 28 29,000 30,000 7 15 22 27 30 30,000 31,000 7 16 24 29 33 31,000 32,000 8 17 26 31 35 32,000 33,000 8 19 27 33 38 33,000 34,000 9 20 29 35 41 34,000 35,000 10 21 31 37 43 35,000 36,000 10 22 33 39 46 36,000 37,000 11 23 35 41 48 37,000 38,000 11 25 36 43 51 38,000 39,000 12 26 38 45 53 39,000 40,000 12 27 40 48 55 40,000 41,000 13 28 42 49 58 41,000 42,000 13 29 44 52 60 42,000 43,000 14 30 46 54 62 43,000 44,000 14 32 47 56 65 44,000 45,000 15 33 48 59 67 45,000 46,000 15 34 51 60 70 46,000 47,000 16 35 52 63 72 47,000 48,000 17 36 54 65 74 48,000 49,000 17 38 55 67 77 49,000 50,000 18 39 57 69 79 50,000 51,000 18 40 59 71 82 51,000 52,000 19 41 61 73 84 52,000 53,000 19 42 63 75 87 53,000 54,000 20 43 65 77 89 54,000 55,000 20 45 66 80 91 55,000 56,000 21 46 68 81 94 56,000 57,000 21 47 70 84 96 57,000 58,000 22 48 72 86 98 58,000 59,000 22 50 73 88 101 59,000 60,000 23 51 75 90 103 60,000 62,000 24 52 78 93 108 62,000 64,000 25 55 81 97 113 64,000 66,000 26 57 85 101 118 66,000 68,000 27 60 88 106 122 68,000 70,000 28 62 92 110 127 70,000 72,000 29 64 96 114 132 72,000 74,000 30 67 99 118 137 74,000 76,000 31 69 103 122 142 76,000 78,000 32 72 105 127 147 78,000 80,000 34 73 110 131 151 80,000 85,000 35 78 116 138 160 85,000 90,000 38 84 124 149 172 90,000 95,000 41 90 133 160 184 95,000 100,000 44 95 142 171 196 100,000 110,000 48 104 156 186 214 110,000 120,000 53 116 173 207 240 120,000 130,000 58 128 191 228 264 130,000 140,000 64 140 208 249 288 140,000 150,000 69 152 226 270 313 150,000 160,000 75 164 243 292 336 160,000 170,000 80 176 261 312 361 170,000 180,000 85 188 278 334 386 180,000 190,000 91 199 296 355 410 190,000 200,000 96 211 314 376 434 200,000 210,000 101 223 332 397 459 210,000 220,000 107 235 349 418 483 220,000 230,000 112 247 367 439 507 230,000 240,000 118 259 384 460 532 240,000 And up 123 271 401 482 556 SECTION 5. Free efile EFFECTIVE DATE This revenue procedure applies to passenger automobiles that a taxpayer first places in service or first leases during calendar year 2013. Free efile SECTION 6. Free efile DRAFTING INFORMATION The principal author of this revenue procedure is Bernard P. Free efile Harvey of the Office of Associate Chief Counsel (Income Tax & Accounting). Free efile For further information regarding this revenue procedure, contact Mr. Free efile Harvey at (202) 622-4930 (not a toll-free call). Free efile Prev  Up  Next   Home   More Internal Revenue Bulletins
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Question to Ask When Shopping for a Mortgage

When shopping for a home mortgage make sure you obtain all the relevant information:

  • Research current interest rates. Check the real estate section of your local newspaper, use the Internet, or call at least six lenders for information.
  • Check the rates for 30-year, 20-year and 15-year mortgages. You may be able to save thousands of dollars in interest charges by getting the shortest-term mortgage you can afford.
  • Ask for details on the same loan amount, loan term, and type of loan from multiple lenders so that you can compare the information. Be sure to get the Annual Percentage Rate (APR), which takes into account not only the interest rate but also points, broker fees, and other credit charges expressed as a yearly rate.
  • Ask whether the rate is fixed or adjustable. The interest rate on adjustable rate mortgage loans (ARMs) can vary a great deal over the lifetime of the mortgage. An increase of several percentage points might raise payments by hundreds of dollars per month.
  • If a loan has an adjustable rate, ask when and how the rate and loan payment could change.
  • Find out how much down payment is required. Some lenders require 20% of the home's purchase price as a down payment. But many lenders now offer loans that require less. In these cases, you may be required to purchase private mortgage insurance (PMI) to protect the lender if you fall behind on payments.
  • If PMI is required, ask what the total cost of the insurance will be. How much will the monthly mortgage payment be when the PMI premium is added and how long you will be required to carry PMI?
  • Ask if you can pay off the loan early and if there is a penalty for doing so.

There is a long list of sources for mortgages loans: mortgage banks, mortgage brokers, banks, thrifts and credit unions, home builders, real estate agencies and Internet lenders.

Tips for Working with Lenders

  • Get recommendations: Ask friends and family members for suggestions, especially if they've recently obtained a loan.
  • Check credentials: Mortgage bankers are regulated by either your state's department of banking or division of real estate. Check with the one appropriate to your state to see if a lender is in good professional standing. Mortgage brokers may be state regulated or not. If not, check with the local chapter of the National Association of Mortgage Brokers or the Better Business Bureau to see if their record is clean.
  • Do your homework: Learn about typical mortgages and ask questions when something looks amiss; a broker may be trying to pad closing costs or other fees at your expense.
  • Take care online: There are plenty of attractive deals online, but first make sure you're dealing with a reliable broker or lender.

If you're working with a broker, the National Consumer Law Center recommends you demand to know how much the broker is making from the lender as well as from any fees you might be paying. It's best to get this information upfront and in writing. Avoid a broker who is double-dipping-getting a fat premium from the lender, as well as fees from you.

The Real Estate Settlement Procedures Act (RESPA) requires lenders to give you information on all closing costs and escrow account practices. Any business relationships between the lender and closing service providers or other parties to the transaction must also be disclosed. Many of the fees are negotiable. More information is available from the Federal Trade Commission, the Federal Reserve Board, and the Department of Housing and Urban Development.

For more information on home buying and mortgages, visit Fannie Mae's website or call 202-752-7000.

The Free Efile

Free efile 6. Free efile   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Free efile Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Free efile Also use basis to figure depreciation, amortization, depletion, and casualty losses. Free efile If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Free efile Only the basis allocated to the business or investment use of the property can be depreciated. Free efile Your original basis in property is adjusted (increased or decreased) by certain events. Free efile For example, if you make improvements to the property, increase your basis. Free efile If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Free efile Keep accurate records of all items that affect the basis of your assets. Free efile For information on keeping records, see chapter 1. Free efile Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Free efile Cost Basis The basis of property you buy is usually its cost. Free efile Cost is the amount you pay in cash, debt obligations, other property, or services. Free efile Your cost includes amounts you pay for sales tax, freight, installation, and testing. Free efile The basis of real estate and business assets will include other items, discussed later. Free efile Basis generally does not include interest payments. Free efile However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Free efile You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Free efile Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Free efile Loans with low or no interest. Free efile   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. Free efile You generally have unstated interest if your interest rate is less than the applicable federal rate. Free efile See the discussion of unstated interest in Publication 537, Installment Sales. Free efile Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Free efile If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Free efile Some of these expenses are discussed next. Free efile Lump sum purchase. Free efile   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. Free efile Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Free efile Figure the basis of each asset by multiplying the lump sum by a fraction. Free efile The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Free efile Fair market value (FMV). Free efile   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. Free efile Sales of similar property on or about the same date may help in figuring the FMV of the property. Free efile 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. Free efile Real estate taxes. Free efile   If you pay the 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. Free efile   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Free efile Whether or not you reimburse the seller, do not include that amount in the basis of your property. Free efile Settlement costs. Free efile   Your basis includes the settlement fees and closing costs for buying the property. Free efile See Publication 551 for a detailed list of items you can and cannot include in basis. Free efile   Do not include fees and costs for getting a loan on the property. Free efile Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free efile Points. Free efile   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. Free efile You may be able to deduct the points currently or over the term of the loan. Free efile For more information about deducting points, see Points in chapter 4 of Publication 535. Free efile Assumption of a mortgage. Free efile   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. Free efile Example. Free efile If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Free efile Constructing assets. Free efile   If you build property or have assets built for you, your expenses for this construction are part of your basis. Free efile Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Free efile   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Free efile You must capitalize them (include them in the asset's basis). Free efile Employee wages paid for the construction work, reduced by any employment credits allowed. Free efile Depreciation on equipment you own while it is used in the construction. Free efile Operating and maintenance costs for equipment used in the construction. Free efile The cost of business supplies and materials used in the construction. Free efile    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. Free efile Allocating the Basis 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. Free efile To determine the basis of these assets or separate items, there must be an allocation of basis. Free efile Group of assets acquired. Free efile   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Free efile Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Free efile You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Free efile 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. Free efile Farming business acquired. Free efile   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. Free efile Generally, reduce the purchase price by any cash received. Free efile 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. Free efile See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Free efile Transplanted embryo. Free efile   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. Free efile Allocate the rest of the purchase price to the basis of the calf. Free efile Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Free efile 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. Free efile You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Free efile 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. Free efile 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. Free efile You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Free efile You are not subject to the uniform capitalization rules if the property is produced for personal use. Free efile In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Free efile Plants. Free efile   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. Free efile Animals. Free efile   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Free efile The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Free efile Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Free efile For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Free efile For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Free efile Exceptions. Free efile   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. Free efile   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Free efile See Accrual Method Required under Accounting Methods in chapter 2. Free efile   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Free efile If you make this election, special rules apply. Free efile This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Free efile 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. Free efile    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. Free efile See chapter 7, for additional information on depreciation. Free efile Example. Free efile You grow trees that have a preproductive period of more than 2 years. Free efile The trees produce an annual crop. Free efile You are an individual and the uniform capitalization rules apply to your farming business. Free efile You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Free efile You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Free efile Preproductive period of more than 2 years. Free efile   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Free efile Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Free efile Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Free efile More information. Free efile   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Free efile 263A-4. Free efile Table 6-1. Free efile 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. Free efile Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts 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 to the cost basis or basis other than cost (discussed later) of the property. Free efile The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Free efile Increases to Basis Increase the basis of any property by all items properly added to a capital account. Free efile These include the cost of any improvements having a useful life of more than 1 year. Free efile The following costs increase the basis of property. Free efile The cost of extending utility service lines to property. Free efile Legal fees, such as the cost of defending and perfecting title. Free efile Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Free efile Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Free efile Do not deduct these expenses as taxes. Free efile However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Free efile 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. Free efile See chapter 7. Free efile Deducting vs. Free efile capitalizing costs. Free efile   Do not add to your basis costs you can deduct as current expenses. Free efile For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Free efile However, you can elect either to deduct or to capitalize certain other costs. Free efile See chapter 7 in Publication 535. Free efile Decreases to Basis The following are some items that reduce the basis of property. Free efile Section 179 deduction. Free efile Deductions previously allowed or allowable for amortization, depreciation, and depletion. Free efile Alternative motor vehicle credit. Free efile See Form 8910. Free efile Alternative fuel vehicle refueling property credit. Free efile See Form 8911. Free efile Residential energy efficient property credits. Free efile See Form 5695. Free efile Investment credit (part or all) taken. Free efile Casualty and theft losses and insurance reimbursements. Free efile Payments you receive for granting an easement. Free efile Exclusion from income of subsidies for energy conservation measures. Free efile Certain canceled debt excluded from income. Free efile Rebates from a manufacturer or seller. Free efile Patronage dividends received from a cooperative association as a result of a purchase of property. Free efile See Patronage Dividends in chapter 3. Free efile Gas-guzzler tax. Free efile See Form 6197. Free efile Some of these items are discussed next. Free efile For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Free efile Depreciation and section 179 deduction. Free efile   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Free efile For more information on these deductions, see chapter 7. Free efile Section 179 deduction. Free efile   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. Free efile Depreciation. Free efile   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. Free efile If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Free efile If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Free efile   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. Free efile   See chapter 7 for information on figuring the depreciation you should have claimed. Free efile   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. Free efile Casualty and theft losses. Free efile   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Free efile Also, decrease it by any deductible loss not covered by insurance. Free efile See chapter 11 for information about figuring your casualty or theft loss. Free efile   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Free efile To make this determination, compare the repaired property to the property before the casualty. Free efile Easements. Free efile   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Free efile It reduces the basis of the affected part of the property. Free efile 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. Free efile See Easements and rights-of-way in chapter 3. Free efile Exclusion from income of subsidies for energy conservation measures. Free efile   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. Free efile Reduce the basis of the property by the excluded amount. Free efile Canceled debt excluded from income. Free efile   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. Free efile A debt includes any indebtedness for which you are liable or which attaches to property you hold. Free efile   You can exclude your canceled debt from income if the debt is any of the following. Free efile Debt canceled in a bankruptcy case or when you are insolvent. Free efile Qualified farm debt. Free efile Qualified real property business debt (provided you are not a C corporation). Free efile Qualified principal residence indebtedness. Free efile Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Free efile If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Free efile If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Free efile   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Free efile For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Free efile For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Free efile For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Free efile Basis Other Than Cost There are times when you cannot use cost as basis. Free efile In these situations, the fair market value or the adjusted basis of property may be used. Free efile Examples are discussed next. Free efile Property changed from personal to business or rental use. Free efile   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. Free efile An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Free efile   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Free efile   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Free efile The basis for figuring a gain is your adjusted basis in the property when you sell the property. Free efile 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. Free efile Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Free efile Property received for services. Free efile   If you receive property for services, include the property's FMV in income. Free efile The amount you include in income becomes your basis. Free efile 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. Free efile Example. Free efile George Smith is an accountant and also operates a farming business. Free efile George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Free efile The accounting work and the cow are each worth $1,500. Free efile George must include $1,500 in income for his accounting services. Free efile George's basis in the cow is $1,500. Free efile Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Free efile A taxable gain or deductible loss also is known as a recognized gain or loss. Free efile A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Free efile 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. Free efile Example. Free efile You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Free efile You must report a taxable gain of $4,000 for the land. Free efile The tractor has a basis of $6,000. Free efile Involuntary Conversions 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. Free efile Similar or related property. Free efile   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. Free efile However, make the following adjustments. Free efile Decrease the basis by the following amounts. Free efile Any loss you recognize on the involuntary conversion. Free efile Any money you receive that you do not spend on similar property. Free efile Increase the basis by the following amounts. Free efile Any gain you recognize on the involuntary conversion. Free efile Any cost of acquiring the replacement property. Free efile Money or property not similar or related. Free efile   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. Free efile Allocating the basis. Free efile   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Free efile Basis for depreciation. Free efile   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Free efile For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Free efile For more information about involuntary conversions, see chapter 11. Free efile Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Free efile A nontaxable gain or loss also is known as an unrecognized gain or loss. Free efile If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Free efile Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Free efile 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. Free efile There must also be an exchange of like-kind property. Free efile For more information, see Like-Kind Exchanges in  chapter 8. Free efile The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Free efile Example 1. Free efile You traded a truck you used in your farming business for a new smaller truck to use in farming. Free efile The adjusted basis of the old truck was $10,000. Free efile The FMV of the new truck is $30,000. Free efile 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. Free efile Example 2. Free efile You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Free efile You use both the field cultivator and the planter in your farming business. Free efile The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Free efile   Exchange expenses generally are the closing costs that you pay. Free efile They include such items as brokerage commissions, attorney fees, and deed preparation fees. Free efile Add them to the basis of the like-kind property you receive. Free efile Property plus cash. Free efile   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. Free efile Example. Free efile You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Free efile Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Free efile Special rules for related persons. Free efile   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. Free efile 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. Free efile Each person reports it on the tax return filed for the year in which the later disposition occurred. Free efile If this rule applies, the basis of the property received in the original exchange will be its FMV. Free efile For more information, see chapter 8. Free efile Exchange of business property. Free efile   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Free efile For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Free efile Basis for depreciation. Free efile   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Free efile For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Free efile Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Free efile The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Free efile Decrease the basis by the following amounts. Free efile Any money you receive. Free efile Any loss you recognize on the exchange. Free efile Increase the basis by the following amounts. Free efile Any additional costs you incur. Free efile Any gain you recognize on the exchange. Free efile If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Free efile Example 1. Free efile You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Free efile You realize a gain of $40,000. Free efile This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Free efile Include your gain in income (recognize gain) only to the extent of the cash received. Free efile Your basis in the land you received is figured as follows. Free efile Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Free efile You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Free efile You realize a gain of $7,250. Free efile 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). Free efile You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Free efile Your basis in the truck you received is figured as follows. Free efile 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. Free efile   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. Free efile The rest is the basis of the like-kind property. Free efile Example. Free efile You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Free efile You also received $1,000 cash and a truck that had an FMV of $3,000. Free efile The truck is unlike property. Free efile You realized a gain of $1,500. Free efile 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). Free efile 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. Free efile Your basis in the properties you received is figured as follows. Free efile 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). Free efile This is the truck's FMV. Free efile The rest ($12,500) is the basis of the tractor. Free efile Sale and Purchase 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. Free efile Example. Free efile You used a tractor on your farm for 3 years. Free efile Its adjusted basis is $22,000 and its FMV is $40,000. Free efile You are interested in a new tractor, which sells for $60,000. Free efile Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Free efile Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Free efile However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Free efile Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Free efile Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Free efile 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. Free efile You also must know its FMV at the time it was given to you and any gift tax paid on it. Free efile FMV equal to or greater than donor's adjusted basis. Free efile   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. Free efile Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Free efile   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. Free efile See Adjusted Basis , earlier. Free efile   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. Free efile Figure the increase by multiplying the gift tax paid by the following fraction. Free efile Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Free efile 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. Free efile Example. Free efile In 2013, you received a gift of property from your mother that had an FMV of $50,000. Free efile Her adjusted basis was $20,000. Free efile The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Free efile She paid a gift tax of $7,320. Free efile Your basis, $26,076, is figured as follows. Free efile Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Free efile 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Free efile If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Free efile However, your basis cannot exceed the FMV of the gift when it was given to you. Free efile FMV less than donor's adjusted basis. Free efile   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. Free efile Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Free efile 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. Free efile (See Adjusted Basis , earlier. Free efile )   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. Free efile Example. Free efile You received farmland as a gift from your parents when they retired from farming. Free efile At the time of the gift, the land had an FMV of $80,000. Free efile Your parents' adjusted basis was $100,000. Free efile After you received the land, no events occurred that would increase or decrease your basis. Free efile 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. Free efile 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. Free efile If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Free efile 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. Free efile If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Free efile Business property. Free efile   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. Free efile 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. Free efile The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Free efile 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. Free efile 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. Free efile For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Free efile Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Free efile If a federal estate return is filed, you can use its appraised value. Free efile The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Free efile For information on the alternate valuation, see the Instructions for Form 706. Free efile 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. Free efile 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. Free efile Special-use valuation method. Free efile   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. Free efile If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Free efile 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. Free efile The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Free efile   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. Free efile 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. Free efile Figure all FMVs without regard to the special-use valuation. Free efile   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. Free efile 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. Free efile The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Free efile   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Free efile 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. Free efile 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. Free efile The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Free efile   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, 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. Free efile   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Free efile Property inherited from a decedent who died in 2010. Free efile   If you inherited property from a decedent who died in 2010, different rules may apply. Free efile See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Free efile 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. Free efile Partner's basis. Free efile   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. Free efile 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. Free efile For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Free efile Shareholder's basis. Free efile   The basis of property distributed by a corporation to a shareholder is its fair market value. Free efile For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Free efile Prev  Up  Next   Home   More Online Publications