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Freetaxusa2010Freetaxusa2010 13. Freetaxusa2010 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. Freetaxusa2010 It is divided into the following sections. Freetaxusa2010 Cost basis. Freetaxusa2010 Adjusted basis. Freetaxusa2010 Basis other than cost. Freetaxusa2010 Your basis is the amount of your investment in property for tax purposes. Freetaxusa2010 Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Freetaxusa2010 Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Freetaxusa2010 If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Freetaxusa2010 Only the basis allocated to the business or investment use of the property can be depreciated. Freetaxusa2010 Your original basis in property is adjusted (increased or decreased) by certain events. Freetaxusa2010 For example, if you make improvements to the property, increase your basis. Freetaxusa2010 If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Freetaxusa2010 Keep accurate records of all items that affect the basis of your property. Freetaxusa2010 For more information on keeping records, see chapter 1. Freetaxusa2010 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. Freetaxusa2010 The cost is the amount you pay in cash, debt obligations, other property, or services. Freetaxusa2010 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). Freetaxusa2010 In addition, the basis of real estate and business assets may include other items. Freetaxusa2010 Loans with low or no interest. Freetaxusa2010 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. Freetaxusa2010 You generally have unstated interest if your interest rate is less than the applicable federal rate. Freetaxusa2010 For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Freetaxusa2010 Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Freetaxusa2010 If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Freetaxusa2010 Lump sum purchase. Freetaxusa2010 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. Freetaxusa2010 Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Freetaxusa2010 Figure the basis of each asset by multiplying the lump sum by a fraction. Freetaxusa2010 The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Freetaxusa2010 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. Freetaxusa2010 Fair market value (FMV). Freetaxusa2010 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. Freetaxusa2010 Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Freetaxusa2010 Assumption of mortgage. Freetaxusa2010 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. Freetaxusa2010 Settlement costs. Freetaxusa2010 Your basis includes the settlement fees and closing costs you paid for buying the property. Freetaxusa2010 (A fee for buying property is a cost that must be paid even if you buy the property for cash. Freetaxusa2010 ) Do not include fees and costs for getting a loan on the property in your basis. Freetaxusa2010 The following are some of the settlement fees or closing costs you can include in the basis of your property. Freetaxusa2010 Abstract fees (abstract of title fees). Freetaxusa2010 Charges for installing utility services. Freetaxusa2010 Legal fees (including fees for the title search and preparation of the sales contract and deed). Freetaxusa2010 Recording fees. Freetaxusa2010 Survey fees. Freetaxusa2010 Transfer taxes. Freetaxusa2010 Owner's title insurance. Freetaxusa2010 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. Freetaxusa2010 Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Freetaxusa2010 The following are some of the settlement fees and closing costs you cannot include in the basis of property. Freetaxusa2010 Casualty insurance premiums. Freetaxusa2010 Rent for occupancy of the property before closing. Freetaxusa2010 Charges for utilities or other services related to occupancy of the property before closing. Freetaxusa2010 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. Freetaxusa2010 Fees for refinancing a mortgage. Freetaxusa2010 Real estate taxes. Freetaxusa2010 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. Freetaxusa2010 You cannot deduct them as an expense. Freetaxusa2010 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. Freetaxusa2010 Do not include that amount in the basis of your property. Freetaxusa2010 If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Freetaxusa2010 Points. Freetaxusa2010 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. Freetaxusa2010 Generally, you deduct the points over the term of the loan. Freetaxusa2010 For more information on how to deduct points, see chapter 23. Freetaxusa2010 Points on home mortgage. Freetaxusa2010 Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Freetaxusa2010 If certain requirements are met, you can deduct the points in full for the year in which they are paid. Freetaxusa2010 Reduce the basis of your home by any seller-paid points. Freetaxusa2010 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. Freetaxusa2010 The result is the adjusted basis. Freetaxusa2010 Increases to Basis Increase the basis of any property by all items properly added to a capital account. Freetaxusa2010 Examples of items that increase basis are shown in Table 13-1. Freetaxusa2010 These include the items discussed below. Freetaxusa2010 Improvements. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 Assessments for local improvements. Freetaxusa2010 Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Freetaxusa2010 Do not deduct them as taxes. Freetaxusa2010 However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Freetaxusa2010 Example. Freetaxusa2010 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. Freetaxusa2010 Add the assessment to your property's basis. Freetaxusa2010 In this example, the assessment is a depreciable asset. Freetaxusa2010 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. Freetaxusa2010 Examples of items that decrease basis are shown in Table 13-1. Freetaxusa2010 These include the items discussed below. Freetaxusa2010 Table 13-1. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Freetaxusa2010 For more information on casualty and theft losses, see chapter 25. Freetaxusa2010 Depreciation and section 179 deduction. Freetaxusa2010 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. Freetaxusa2010 For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Freetaxusa2010 Example. Freetaxusa2010 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. Freetaxusa2010 You added an improvement to the duplex that cost $10,000. Freetaxusa2010 In February last year, the duplex was damaged by fire. Freetaxusa2010 Up to that time, you had been allowed depreciation of $23,000. Freetaxusa2010 You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Freetaxusa2010 You deducted a casualty loss of $1,000 on your income tax return for last year. Freetaxusa2010 You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Freetaxusa2010 You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Freetaxusa2010 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. Freetaxusa2010 Your basis in the land is its original cost of $5,000. Freetaxusa2010 Easements. Freetaxusa2010 The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Freetaxusa2010 It reduces the basis of the affected part of the property. Freetaxusa2010 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. Freetaxusa2010 If the gain is on a capital asset, see chapter 16 for information about how to report it. Freetaxusa2010 If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Freetaxusa2010 Exclusion of subsidies for energy conservation measures. Freetaxusa2010 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. Freetaxusa2010 Reduce the basis of the property for which you received the subsidy by the excluded amount. Freetaxusa2010 For more information about this subsidy, see chapter 12. Freetaxusa2010 Postponed gain from sale of home. Freetaxusa2010 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. Freetaxusa2010 For more information on the rules for the sale of a home, see chapter 15. Freetaxusa2010 Basis Other Than Cost There are many times when you cannot use cost as basis. Freetaxusa2010 In these cases, the fair market value or the adjusted basis of the property can be used. Freetaxusa2010 Fair market value (FMV) and adjusted basis were discussed earlier. Freetaxusa2010 Property Received for Services If you receive property for your services, include the FMV of the property in income. Freetaxusa2010 The amount you include in income becomes your basis. Freetaxusa2010 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. Freetaxusa2010 Restricted property. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 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). Freetaxusa2010 For more information, see Restricted Property in Publication 525. Freetaxusa2010 Bargain purchases. Freetaxusa2010 A bargain purchase is a purchase of an item for less than its FMV. Freetaxusa2010 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. Freetaxusa2010 Your basis in the property is its FMV (your purchase price plus the amount you include in income). Freetaxusa2010 If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Freetaxusa2010 However, your basis in the property is still its FMV. Freetaxusa2010 See Employee Discounts in Publication 15-B. Freetaxusa2010 Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Freetaxusa2010 A taxable gain or deductible loss also is known as a recognized gain or loss. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 Similar or related property. Freetaxusa2010 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. Freetaxusa2010 Decrease the basis by the following. Freetaxusa2010 Any loss you recognize on the involuntary conversion. Freetaxusa2010 Any money you receive that you do not spend on similar property. Freetaxusa2010 Increase the basis by the following. Freetaxusa2010 Any gain you recognize on the involuntary conversion. Freetaxusa2010 Any cost of acquiring the replacement property. Freetaxusa2010 Money or property not similar or related. Freetaxusa2010 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. Freetaxusa2010 Example. Freetaxusa2010 The state condemned your property. Freetaxusa2010 The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Freetaxusa2010 You realized a gain of $5,000 ($31,000 − $26,000). Freetaxusa2010 You bought replacement property similar in use to the converted property for $29,000. Freetaxusa2010 You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Freetaxusa2010 Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Freetaxusa2010 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. Freetaxusa2010 If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Freetaxusa2010 Basis for depreciation. Freetaxusa2010 Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Freetaxusa2010 For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Freetaxusa2010 Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Freetaxusa2010 If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Freetaxusa2010 See Nontaxable Trades in chapter 14. Freetaxusa2010 Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Freetaxusa2010 To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Freetaxusa2010 Qualifying property. Freetaxusa2010 Like-kind property. Freetaxusa2010 The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Freetaxusa2010 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. Freetaxusa2010 Qualifying property. Freetaxusa2010 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. Freetaxusa2010 Like-kind property. Freetaxusa2010 There must be an exchange of like-kind property. Freetaxusa2010 Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Freetaxusa2010 The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Freetaxusa2010 Example. Freetaxusa2010 You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Freetaxusa2010 The dealer allows you $2,000 on the old truck, and you pay $4,800. Freetaxusa2010 This is a like-kind exchange. Freetaxusa2010 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). Freetaxusa2010 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). Freetaxusa2010 The basis of the new truck is the price you pay the dealer. Freetaxusa2010 Partially nontaxable exchanges. Freetaxusa2010 A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Freetaxusa2010 The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Freetaxusa2010 Decrease the basis by the following amounts. Freetaxusa2010 Any money you receive. Freetaxusa2010 Any loss you recognize on the exchange. Freetaxusa2010 Increase the basis by the following amounts. Freetaxusa2010 Any additional costs you incur. Freetaxusa2010 Any gain you recognize on the exchange. Freetaxusa2010 If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Freetaxusa2010 Allocation of basis. Freetaxusa2010 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. Freetaxusa2010 The rest is the basis of the like-kind property. Freetaxusa2010 More information. Freetaxusa2010 See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Freetaxusa2010 Basis for depreciation. Freetaxusa2010 Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Freetaxusa2010 For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Freetaxusa2010 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. Freetaxusa2010 The same rule applies to a transfer by your former spouse that is incident to divorce. Freetaxusa2010 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. Freetaxusa2010 If the property transferred to you is a series E, series EE, or series I U. Freetaxusa2010 S. Freetaxusa2010 savings bond, the transferor must include in income the interest accrued to the date of transfer. Freetaxusa2010 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. Freetaxusa2010 For more information on these bonds, see chapter 7. Freetaxusa2010 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. Freetaxusa2010 For more information about the transfer of property from a spouse, see chapter 14. Freetaxusa2010 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. Freetaxusa2010 FMV less than donor's adjusted basis. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 See Adjusted Basis , earlier. Freetaxusa2010 Example. Freetaxusa2010 You received an acre of land as a gift. Freetaxusa2010 At the time of the gift, the land had an FMV of $8,000. Freetaxusa2010 The donor's adjusted basis was $10,000. Freetaxusa2010 After you received the property, no events occurred to increase or decrease your basis. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Freetaxusa2010 Business property. Freetaxusa2010 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. Freetaxusa2010 FMV equal to or greater than donor's adjusted basis. Freetaxusa2010 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. Freetaxusa2010 Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Freetaxusa2010 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. Freetaxusa2010 See Adjusted Basis , earlier. Freetaxusa2010 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. Freetaxusa2010 Figure the increase by multiplying the gift tax paid by a fraction. Freetaxusa2010 The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Freetaxusa2010 The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Freetaxusa2010 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. Freetaxusa2010 Example. Freetaxusa2010 In 2013, you received a gift of property from your mother that had an FMV of $50,000. Freetaxusa2010 Her adjusted basis was $20,000. Freetaxusa2010 The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Freetaxusa2010 She paid a gift tax of $7,320 on the property. Freetaxusa2010 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) × . Freetaxusa2010 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. Freetaxusa2010 If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Freetaxusa2010 However, your basis cannot exceed the FMV of the gift at the time it was given to you. Freetaxusa2010 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. Freetaxusa2010 The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Freetaxusa2010 Property inherited from a decedent who died in 2010. Freetaxusa2010 If you inherited property from a decedent who died in 2010, special rules may apply. Freetaxusa2010 For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Freetaxusa2010 Community property. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 Example. Freetaxusa2010 You and your spouse owned community property that had a basis of $80,000. Freetaxusa2010 When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Freetaxusa2010 The FMV of the community interest was $100,000. Freetaxusa2010 The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Freetaxusa2010 The basis of the other half to your spouse's heirs is also $50,000. Freetaxusa2010 For more information about community property, see Publication 555, Community Property. Freetaxusa2010 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. Freetaxusa2010 To do so, you must figure its basis for depreciation at the time of the change. Freetaxusa2010 An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Freetaxusa2010 Basis for depreciation. Freetaxusa2010 The basis for depreciation is the lesser of the following amounts. Freetaxusa2010 The FMV of the property on the date of the change. Freetaxusa2010 Your adjusted basis on the date of the change. Freetaxusa2010 Example. Freetaxusa2010 Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Freetaxusa2010 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. Freetaxusa2010 Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Freetaxusa2010 Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Freetaxusa2010 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. Freetaxusa2010 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). Freetaxusa2010 Sale of property. Freetaxusa2010 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. Freetaxusa2010 Gain. Freetaxusa2010 The basis for figuring a gain is your adjusted basis in the property when you sell the property. Freetaxusa2010 Example. Freetaxusa2010 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. Freetaxusa2010 Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Freetaxusa2010 Loss. Freetaxusa2010 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. Freetaxusa2010 Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Freetaxusa2010 Example. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 Reduce that amount ($180,000) by the depreciation deductions ($37,500). Freetaxusa2010 The basis for loss is $142,500 ($180,000 − $37,500). Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 You must adjust the basis of stocks for certain events that occur after purchase. Freetaxusa2010 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. Freetaxusa2010 This rule applies only when the additional stock received is identical to the stock held. Freetaxusa2010 Also reduce your basis when you receive nontaxable distributions. Freetaxusa2010 They are a return of capital. Freetaxusa2010 Example. Freetaxusa2010 In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Freetaxusa2010 In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Freetaxusa2010 In 2013 XYZ declared a 2-for-1 stock split. Freetaxusa2010 You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Freetaxusa2010 Other basis. Freetaxusa2010 There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Freetaxusa2010 For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Freetaxusa2010 Identifying stocks or bonds sold. Freetaxusa2010 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. Freetaxusa2010 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. Freetaxusa2010 For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Freetaxusa2010 Mutual fund shares. Freetaxusa2010 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. Freetaxusa2010 For more information, see Publication 550. Freetaxusa2010 Bond premium. Freetaxusa2010 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. Freetaxusa2010 See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Freetaxusa2010 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. Freetaxusa2010 Original issue discount (OID) on debt instruments. Freetaxusa2010 You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Freetaxusa2010 See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Freetaxusa2010 Tax-exempt obligations. Freetaxusa2010 OID on tax-exempt obligations is generally not taxable. Freetaxusa2010 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. Freetaxusa2010 The accrued OID is added to the basis of the obligation to determine your gain or loss. Freetaxusa2010 See chapter 4 of Publication 550. Freetaxusa2010 Prev Up Next Home More Online Publications
Apply for a Passport
Know the Steps to Take
A valid U.S. passport is required to enter and leave most foreign countries. Only the U.S. Department of State has the authority to grant, issue, or verify U.S. passports.
The Passport Services Office provides information and services to American citizens about how to obtain, replace or change a passport. To obtain a passport for the first time, you need to go in person to one of 7,000 passport acceptance facilities located throughout the United States with:
- Two photographs of you taken within the last six months
- Proof of U.S. citizenship
- A valid form of photo identification (such as a driver's license)
Acceptance facilities include many Federal, state and probate courts, post offices, some public libraries and a number of county and municipal offices. There are also 20 regional passport agencies, and one Gateway City Agency, which serve customers who are traveling within two weeks (14 days), or who need foreign visas for travel. Appointments are required in such cases.
All American citizens must now have a valid U.S. passport to re-enter the country, regardless of what nations they have been visiting while traveling.