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Late Tax

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Late Tax

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

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