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Free tax service Publication 555 - Introductory Material Table of Contents Future Developments What's New Important Reminder IntroductionOrdering forms and publications. Free tax service Tax questions. Free tax service Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 555, such as legislation enacted after it was published, go to www. Free tax service irs. Free tax service gov/pub555. Free tax service What's New Same-sex marriages. Free tax service  For federal tax purposes, individuals of the same sex are married if they were lawfully married in a state (or foreign country) whose laws authorize the marriage of two individuals of the same sex, even if the state (or foreign country) in which they now live does not recognize same-sex marriage. Free tax service The term "spouse" includes an individual married to a person of the same sex if the couple is lawfully married under state (or foreign) law. Free tax service However, individuals who have entered into a registered domestic partnership, civil union, or other similar relationship that is not called a marriage under state (or foreign) law are not married for federal tax purposes. Free tax service The word “state” as used here includes the District of Columbia, Puerto Rico, and U. Free tax service S. Free tax service territories and possessions. Free tax service It means any domestic jurisdiction that has the legal authority to sanction marriages. Free tax service The term “foreign country” means any foreign jurisdiction that has the legal authority to sanction marriages. Free tax service If individuals of the same sex are married, they generally must use the married filing jointly or married filing separately filing status. Free tax service However, if they did not live together during the last 6 months of the year, one or both of them may be able to use the head of household filing status. Free tax service For details, see Publication 501, Exemptions, Standard Deduction, and Filing Information. Free tax service Also see Revenue Ruling 2013-17 and Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law on IRS. Free tax service gov. Free tax service Important Reminder Photographs of missing children. Free tax service  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free tax service Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free tax service You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free tax service Introduction This publication is for married taxpayers who are domiciled in one of the following community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. Free tax service This publication does not address the federal tax treatment of income or property subject to the “community property” election under Alaska state laws. Free tax service Community property laws affect how you figure your income on your federal income tax return if you are married, live in a community property state or country, and file separate returns. Free tax service If you are married, your tax usually will be less if you file married filing jointly than if you file married filing separately. Free tax service However, sometimes it can be to your advantage to file separate returns. Free tax service If you and your spouse file separate returns, you have to determine your community income and your separate income. Free tax service Community property laws also affect your basis in property you inherit from a married person who lived in a community property state. Free tax service See Death of spouse , later. Free tax service Registered domestic partners. Free tax service    This publication is also for registered domestic partners who are domiciled in Nevada, Washington, or California. Free tax service Registered domestic partners in Nevada, Washington, or California generally must follow state community property laws and report half the combined community income of the individual and his or her registered domestic partner. Free tax service   Registered domestic partners are not married for federal tax purposes. Free tax service They can use the single filing status, or if they qualify, the head of household filing status. Free tax service    You can find answers to frequently asked questions by going to www. Free tax service irs. Free tax service gov/pub555 and clicking on Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions under Other Items You May Find Useful. Free tax service Comments and suggestions. Free tax service    We welcome your comments about this publication and your suggestions for future editions. Free tax service   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free tax service NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free tax service Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free tax service   You can send your comments from www. Free tax service irs. Free tax service gov/formspubs. Free tax service Click on “More Information” and then on “Give us feedback on forms and publications. Free tax service ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free tax service Ordering forms and publications. Free tax service    Visit www. Free tax service irs. Free tax service gov/formspubs to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free tax service Internal Revenue Service 1201 N. Free tax service Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free tax service    If you have a tax question, check the information available on IRS. Free tax service gov or call 1-800-829-1040. Free tax service We cannot answer tax questions sent to either of the above addresses. Free tax service Useful Items - You may want to see: Publication 504 Divorced or Separated Individuals 505 Tax Withholding and Estimated Tax 971 Innocent Spouse Relief Form (and Instructions) 8857 Request for Innocent Spouse Relief 8958 Allocation of Tax Amounts Between Certain Individuals in Community Property States  See How To Get Tax Help near the end of this publication for information about getting these publications and forms. Free tax service Prev  Up  Next   Home   More Online Publications
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Free tax service 13. Free tax service   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Free tax service It is divided into the following sections. Free tax service Cost basis. Free tax service Adjusted basis. Free tax service Basis other than cost. Free tax service Your basis is the amount of your investment in property for tax purposes. Free tax service Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Free tax service Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Free tax service If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Free tax service Only the basis allocated to the business or investment use of the property can be depreciated. Free tax service Your original basis in property is adjusted (increased or decreased) by certain events. Free tax service For example, if you make improvements to the property, increase your basis. Free tax service If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Free tax service Keep accurate records of all items that affect the basis of your property. Free tax service For more information on keeping records, see chapter 1. Free tax service 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 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Free tax service The cost is the amount you pay in cash, debt obligations, other property, or services. Free tax service 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, and Real estate taxes (if you assume liability for the seller). Free tax service In addition, the basis of real estate and business assets may include other items. Free tax service Loans with low or no interest. Free tax service    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. Free tax service You generally have unstated interest if your interest rate is less than the applicable federal rate. Free tax service   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Free tax service Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Free tax service If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Free tax service Lump sum purchase. Free tax service   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. Free tax service Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Free tax service Figure the basis of each asset by multiplying the lump sum by a fraction. Free tax service The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Free tax service    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. Free tax service Fair market value (FMV). Free tax service   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. Free tax service Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Free tax service Assumption of mortgage. Free tax service   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. Free tax service Settlement costs. Free tax service   Your basis includes the settlement fees and closing costs you paid for buying the property. Free tax service (A fee for buying property is a cost that must be paid even if you buy the property for cash. Free tax service ) Do not include fees and costs for getting a loan on the property in your basis. Free tax service   The following are some of the settlement fees or closing costs you can include in the basis of your property. Free tax service Abstract fees (abstract of title fees). Free tax service Charges for installing utility services. Free tax service Legal fees (including fees for the title search and preparation of the sales contract and deed). Free tax service Recording fees. Free tax service Survey fees. Free tax service Transfer taxes. Free tax service Owner's title insurance. Free tax service 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. Free tax service   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free tax service   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Free tax service Casualty insurance premiums. Free tax service Rent for occupancy of the property before closing. Free tax service Charges for utilities or other services related to occupancy of the property before closing. Free tax service 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. Free tax service Fees for refinancing a mortgage. Free tax service Real estate taxes. Free tax service   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. Free tax service You cannot deduct them as an expense. Free tax service    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. Free tax service Do not include that amount in the basis of your property. Free tax service If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Free tax service Points. Free tax service   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. Free tax service Generally, you deduct the points over the term of the loan. Free tax service For more information on how to deduct points, see chapter 23. Free tax service Points on home mortgage. Free tax service   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Free tax service If certain requirements are met, you can deduct the points in full for the year in which they are paid. Free tax service Reduce the basis of your home by any seller-paid points. Free tax service 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 cost basis or basis other than cost (discussed later) of the property. Free tax service The result is the adjusted basis. Free tax service Increases to Basis Increase the basis of any property by all items properly added to a capital account. Free tax service Examples of items that increase basis are shown in Table 13-1. Free tax service These include the items discussed below. Free tax service Improvements. Free tax service   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Free tax service 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. Free tax service Assessments for local improvements. Free tax service   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Free tax service Do not deduct them as taxes. Free tax service However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Free tax service Example. Free tax service 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. Free tax service Add the assessment to your property's basis. Free tax service In this example, the assessment is a depreciable asset. Free tax service 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. Free tax service Examples of items that decrease basis are shown in Table 13-1. Free tax service These include the items discussed below. Free tax service Table 13-1. Free tax service 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:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Free tax service   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. Free tax service    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Free tax service   For more information on casualty and theft losses, see chapter 25. Free tax service Depreciation and section 179 deduction. Free tax service   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. Free tax service   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Free tax service Example. Free tax service 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. Free tax service You added an improvement to the duplex that cost $10,000. Free tax service In February last year, the duplex was damaged by fire. Free tax service Up to that time, you had been allowed depreciation of $23,000. Free tax service You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Free tax service You deducted a casualty loss of $1,000 on your income tax return for last year. Free tax service You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Free tax service You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Free tax service 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 Note. Free tax service Your basis in the land is its original cost of $5,000. Free tax service Easements. Free tax service   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Free tax service It reduces the basis of the affected part of the property. Free tax service 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 tax service   If the gain is on a capital asset, see chapter 16 for information about how to report it. Free tax service If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Free tax service Exclusion of subsidies for energy conservation measures. Free tax service   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 tax service Reduce the basis of the property for which you received the subsidy by the excluded amount. Free tax service For more information about this subsidy, see chapter 12. Free tax service Postponed gain from sale of home. Free tax service    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. Free tax service For more information on the rules for the sale of a home, see chapter 15. Free tax service Basis Other Than Cost There are many times when you cannot use cost as basis. Free tax service In these cases, the fair market value or the adjusted basis of the property can be used. Free tax service Fair market value (FMV) and adjusted basis were discussed earlier. Free tax service Property Received for Services If you receive property for your services, include the FMV of the property in income. Free tax service The amount you include in income becomes your basis. Free tax service 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 tax service Restricted property. Free tax service   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. Free tax service 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. Free tax service 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). Free tax service For more information, see Restricted Property in Publication 525. Free tax service Bargain purchases. Free tax service   A bargain purchase is a purchase of an item for less than its FMV. Free tax service 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. Free tax service Your basis in the property is its FMV (your purchase price plus the amount you include in income). Free tax service   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Free tax service However, your basis in the property is still its FMV. Free tax service See Employee Discounts in Publication 15-B. Free tax service Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Free tax service A taxable gain or deductible loss also is known as a recognized gain or loss. Free tax service 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 tax service 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. Free tax service Similar or related property. Free tax service   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. Free tax service Decrease the basis by the following. Free tax service Any loss you recognize on the involuntary conversion. Free tax service Any money you receive that you do not spend on similar property. Free tax service Increase the basis by the following. Free tax service Any gain you recognize on the involuntary conversion. Free tax service Any cost of acquiring the replacement property. Free tax service Money or property not similar or related. Free tax service    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. Free tax service Example. Free tax service The state condemned your property. Free tax service The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Free tax service You realized a gain of $5,000 ($31,000 − $26,000). Free tax service You bought replacement property similar in use to the converted property for $29,000. Free tax service You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Free tax service Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Free tax service 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. Free tax service   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Free tax service Basis for depreciation. Free tax service   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Free tax service For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Free tax service Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Free tax service If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Free tax service See Nontaxable Trades in chapter 14. Free tax service Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Free tax service To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Free tax service Qualifying property. Free tax service Like-kind property. Free tax service The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Free tax service 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. Free tax service Qualifying property. Free tax service   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. Free tax service Like-kind property. Free tax service   There must be an exchange of like-kind property. Free tax service Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Free tax service The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Free tax service Example. Free tax service You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Free tax service The dealer allows you $2,000 on the old truck, and you pay $4,800. Free tax service This is a like-kind exchange. Free tax service 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). Free tax service 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). Free tax service The basis of the new truck is the price you pay the dealer. Free tax service Partially nontaxable exchanges. Free tax service   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Free tax service 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 tax service Decrease the basis by the following amounts. Free tax service Any money you receive. Free tax service Any loss you recognize on the exchange. Free tax service Increase the basis by the following amounts. Free tax service Any additional costs you incur. Free tax service Any gain you recognize on the exchange. Free tax service If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Free tax service Allocation of basis. Free tax service   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 tax service The rest is the basis of the like-kind property. Free tax service More information. Free tax service   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Free tax service Basis for depreciation. Free tax service   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Free tax service For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Free tax service 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 tax service The same rule applies to a transfer by your former spouse that is incident to divorce. Free tax service 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 tax service If the property transferred to you is a series E, series EE, or series I U. Free tax service S. Free tax service savings bond, the transferor must include in income the interest accrued to the date of transfer. Free tax service 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. Free tax service For more information on these bonds, see chapter 7. Free tax service 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. Free tax service For more information about the transfer of property from a spouse, see chapter 14. Free tax service 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. Free tax service FMV less than donor's adjusted basis. Free tax service   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 tax service 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. Free tax service 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 tax service See Adjusted Basis , earlier. Free tax service Example. Free tax service You received an acre of land as a gift. Free tax service At the time of the gift, the land had an FMV of $8,000. Free tax service The donor's adjusted basis was $10,000. Free tax service After you received the property, no events occurred to increase or decrease your basis. Free tax service 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. Free tax service 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. Free tax service If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Free tax service Business property. Free tax service   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 tax service FMV equal to or greater than donor's adjusted basis. Free tax service   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. Free tax service Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Free tax service   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. Free tax service See Adjusted Basis , earlier. Free tax service   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 tax service Figure the increase by multiplying the gift tax paid by a fraction. Free tax service The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Free tax service   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Free tax service 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 tax service Example. Free tax service In 2013, you received a gift of property from your mother that had an FMV of $50,000. Free tax service Her adjusted basis was $20,000. Free tax service The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Free tax service She paid a gift tax of $7,320 on the property. Free tax service Your basis is $26,076, figured as follows: 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 tax service 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 tax service 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 tax service However, your basis cannot exceed the FMV of the gift at the time it was given to you. Free tax service 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 tax service The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Free tax service 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. Free tax service 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. Free tax service 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 tax service For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Free tax service Property inherited from a decedent who died in 2010. Free tax service   If you inherited property from a decedent who died in 2010, special rules may apply. Free tax service For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free tax service Community property. Free tax service   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Free tax service When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Free tax service For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Free tax service Example. Free tax service You and your spouse owned community property that had a basis of $80,000. Free tax service When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Free tax service The FMV of the community interest was $100,000. Free tax service The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Free tax service The basis of the other half to your spouse's heirs is also $50,000. Free tax service For more information about community property, see Publication 555, Community Property. Free tax service Property Changed From Personal 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. Free tax service To do so, you must figure its basis for depreciation at the time of the change. Free tax service An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Free tax service Basis for depreciation. Free tax service   The basis for depreciation is the lesser of the following amounts. Free tax service The FMV of the property on the date of the change. Free tax service Your adjusted basis on the date of the change. Free tax service Example. Free tax service Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Free tax service 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. Free tax service Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Free tax service Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Free tax service 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. Free tax service 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). Free tax service Sale of property. Free tax service   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. Free tax service Gain. Free tax service   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Free tax service Example. Free tax service 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. Free tax service Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Free tax service Loss. Free tax service   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 tax service Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Free tax service Example. Free tax service 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. Free tax service 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. Free tax service Reduce that amount ($180,000) by the depreciation deductions ($37,500). Free tax service The basis for loss is $142,500 ($180,000 − $37,500). Free tax service 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. Free tax service 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. Free tax service You must adjust the basis of stocks for certain events that occur after purchase. Free tax service 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. Free tax service This rule applies only when the additional stock received is identical to the stock held. Free tax service Also reduce your basis when you receive nontaxable distributions. Free tax service They are a return of capital. Free tax service Example. Free tax service In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Free tax service In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Free tax service In 2013 XYZ declared a 2-for-1 stock split. Free tax service You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Free tax service Other basis. Free tax service   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Free tax service For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Free tax service Identifying stocks or bonds sold. Free tax service   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. Free tax service 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. Free tax service For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Free tax service Mutual fund shares. Free tax service   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. Free tax service For more information, see Publication 550. Free tax service Bond premium. Free tax service   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. Free tax service See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Free tax service 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. Free tax service Original issue discount (OID) on debt instruments. Free tax service   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Free tax service See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Free tax service Tax-exempt obligations. Free tax service    OID on tax-exempt obligations is generally not taxable. Free tax service 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. Free tax service The accrued OID is added to the basis of the obligation to determine your gain or loss. Free tax service See chapter 4 of Publication 550. Free tax service Prev  Up  Next   Home   More Online Publications