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1040ez Forms And Instructions

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1040ez Forms And Instructions

1040ez forms and instructions 3. 1040ez forms and instructions   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. 1040ez forms and instructions Leveraged leases. 1040ez forms and instructions Leveraged leases of limited-use property. 1040ez forms and instructions Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. 1040ez forms and instructions It also discusses how to treat other kinds of payments you make that are related to your use of this property. 1040ez forms and instructions These include payments you make for taxes on the property. 1040ez forms and instructions Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. 1040ez forms and instructions In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. 1040ez forms and instructions If you have or will receive equity in or title to the property, the rent is not deductible. 1040ez forms and instructions Unreasonable rent. 1040ez forms and instructions   You cannot take a rental deduction for unreasonable rent. 1040ez forms and instructions Ordinarily, the issue of reasonableness arises only if you and the lessor are related. 1040ez forms and instructions Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. 1040ez forms and instructions Rent is not unreasonable just because it is figured as a percentage of gross sales. 1040ez forms and instructions For examples of related persons, see Related persons in chapter 2, Publication 544. 1040ez forms and instructions Rent on your home. 1040ez forms and instructions   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. 1040ez forms and instructions You must meet the requirements for business use of your home. 1040ez forms and instructions For more information, see Business use of your home in chapter 1. 1040ez forms and instructions Rent paid in advance. 1040ez forms and instructions   Generally, rent paid in your trade or business is deductible in the year paid or accrued. 1040ez forms and instructions If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. 1040ez forms and instructions You can deduct the rest of your payment only over the period to which it applies. 1040ez forms and instructions Example 1. 1040ez forms and instructions You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. 1040ez forms and instructions Your rent is $12,000 per year. 1040ez forms and instructions You paid the first year's rent ($12,000) on June 30. 1040ez forms and instructions You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. 1040ez forms and instructions Example 2. 1040ez forms and instructions You are a calendar year taxpayer. 1040ez forms and instructions Last January you leased property for 3 years for $6,000 a year. 1040ez forms and instructions You paid the full $18,000 (3 × $6,000) during the first year of the lease. 1040ez forms and instructions Each year you can deduct only $6,000, the part of the lease that applies to that year. 1040ez forms and instructions Canceling a lease. 1040ez forms and instructions   You generally can deduct as rent an amount you pay to cancel a business lease. 1040ez forms and instructions Lease or purchase. 1040ez forms and instructions   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. 1040ez forms and instructions You must first determine whether your agreement is a lease or a conditional sales contract. 1040ez forms and instructions Payments made under a conditional sales contract are not deductible as rent expense. 1040ez forms and instructions Conditional sales contract. 1040ez forms and instructions   Whether an agreement is a conditional sales contract depends on the intent of the parties. 1040ez forms and instructions Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. 1040ez forms and instructions No single test, or special combination of tests, always applies. 1040ez forms and instructions However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. 1040ez forms and instructions The agreement applies part of each payment toward an equity interest you will receive. 1040ez forms and instructions You get title to the property after you make a stated amount of required payments. 1040ez forms and instructions The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. 1040ez forms and instructions You pay much more than the current fair rental value of the property. 1040ez forms and instructions You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. 1040ez forms and instructions Determine this value when you make the agreement. 1040ez forms and instructions You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. 1040ez forms and instructions The agreement designates part of the payments as interest, or that part is easy to recognize as interest. 1040ez forms and instructions Leveraged leases. 1040ez forms and instructions   Leveraged lease transactions may not be considered leases. 1040ez forms and instructions Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. 1040ez forms and instructions Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. 1040ez forms and instructions   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. 1040ez forms and instructions Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. 1040ez forms and instructions Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. 1040ez forms and instructions Internal Revenue Bulletin 2001-19 is available at www. 1040ez forms and instructions irs. 1040ez forms and instructions gov/pub/irs-irbs/irb01-19. 1040ez forms and instructions pdf. 1040ez forms and instructions   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. 1040ez forms and instructions The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. 1040ez forms and instructions The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. 1040ez forms and instructions The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. 1040ez forms and instructions The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. 1040ez forms and instructions The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. 1040ez forms and instructions   The IRS may charge you a user fee for issuing a tax ruling. 1040ez forms and instructions For more information, see Revenue Procedure 2014-1 available at  www. 1040ez forms and instructions irs. 1040ez forms and instructions gov/irb/2014-1_IRB/ar05. 1040ez forms and instructions html. 1040ez forms and instructions Leveraged leases of limited-use property. 1040ez forms and instructions   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. 1040ez forms and instructions Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. 1040ez forms and instructions See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. 1040ez forms and instructions Leases over $250,000. 1040ez forms and instructions   Special rules are provided for certain leases of tangible property. 1040ez forms and instructions The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. 1040ez forms and instructions Rents increase during the lease. 1040ez forms and instructions Rents decrease during the lease. 1040ez forms and instructions Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). 1040ez forms and instructions Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). 1040ez forms and instructions These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). 1040ez forms and instructions   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. 1040ez forms and instructions In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. 1040ez forms and instructions For details, see section 467 of the Internal Revenue Code. 1040ez forms and instructions Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. 1040ez forms and instructions When you can deduct these taxes as additional rent depends on your accounting method. 1040ez forms and instructions Cash method. 1040ez forms and instructions   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. 1040ez forms and instructions Accrual method. 1040ez forms and instructions   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. 1040ez forms and instructions That you have a liability for taxes on the leased property. 1040ez forms and instructions How much the liability is. 1040ez forms and instructions That economic performance occurred. 1040ez forms and instructions   The liability and amount of taxes are determined by state or local law and the lease agreement. 1040ez forms and instructions Economic performance occurs as you use the property. 1040ez forms and instructions Example 1. 1040ez forms and instructions Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. 1040ez forms and instructions Oak leases land for use in its business. 1040ez forms and instructions Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. 1040ez forms and instructions However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. 1040ez forms and instructions Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. 1040ez forms and instructions If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. 1040ez forms and instructions Oak cannot deduct the real estate taxes as rent until the tax bill is issued. 1040ez forms and instructions This is when Oak's liability under the lease becomes fixed. 1040ez forms and instructions Example 2. 1040ez forms and instructions The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. 1040ez forms and instructions As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. 1040ez forms and instructions This is the year in which Oak's liability under the lease becomes fixed. 1040ez forms and instructions Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. 1040ez forms and instructions Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. 1040ez forms and instructions If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. 1040ez forms and instructions For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. 1040ez forms and instructions The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. 1040ez forms and instructions Option to renew. 1040ez forms and instructions   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. 1040ez forms and instructions However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). 1040ez forms and instructions Allocate the lease cost to the original term and any option term based on the facts and circumstances. 1040ez forms and instructions In some cases, it may be appropriate to make the allocation using a present value computation. 1040ez forms and instructions For more information, see Regulations section 1. 1040ez forms and instructions 178-1(b)(5). 1040ez forms and instructions Example 1. 1040ez forms and instructions You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. 1040ez forms and instructions Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. 1040ez forms and instructions Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. 1040ez forms and instructions That is the remaining life of your present lease plus the periods for renewal. 1040ez forms and instructions Example 2. 1040ez forms and instructions The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. 1040ez forms and instructions You can amortize the entire $10,000 over the 20-year remaining life of the original lease. 1040ez forms and instructions The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). 1040ez forms and instructions Cost of a modification agreement. 1040ez forms and instructions   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. 1040ez forms and instructions You must capitalize these payments and amortize them over the remaining period of the lease. 1040ez forms and instructions You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. 1040ez forms and instructions Example. 1040ez forms and instructions You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. 1040ez forms and instructions However, before you occupy it, you decide that you really need less space. 1040ez forms and instructions The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. 1040ez forms and instructions In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. 1040ez forms and instructions   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. 1040ez forms and instructions Your amortization deduction each year will be $150 ($3,000 ÷ 20). 1040ez forms and instructions You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. 1040ez forms and instructions Commissions, bonuses, and fees. 1040ez forms and instructions   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. 1040ez forms and instructions You must amortize these costs over the term of the lease. 1040ez forms and instructions Loss on merchandise and fixtures. 1040ez forms and instructions   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. 1040ez forms and instructions You must capitalize the loss and amortize it over the remaining term of the lease. 1040ez forms and instructions Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). 1040ez forms and instructions Depreciate the property over its appropriate recovery period. 1040ez forms and instructions You cannot amortize the cost over the remaining term of the lease. 1040ez forms and instructions If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. 1040ez forms and instructions For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. 1040ez forms and instructions Assignment of a lease. 1040ez forms and instructions   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. 1040ez forms and instructions If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. 1040ez forms and instructions The rest is for your investment in the permanent improvements. 1040ez forms and instructions   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. 1040ez forms and instructions You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. 1040ez forms and instructions Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 1040ez forms and instructions Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. 1040ez forms and instructions You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040ez forms and instructions Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. 1040ez forms and instructions Uniform capitalization rules. 1040ez forms and instructions   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. 1040ez forms and instructions Produce real property or tangible personal property. 1040ez forms and instructions For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. 1040ez forms and instructions Acquire property for resale. 1040ez forms and instructions However, these rules do not apply to the following property. 1040ez forms and instructions Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. 1040ez forms and instructions Property you produce if you meet either of the following conditions. 1040ez forms and instructions Your indirect costs of producing the property are $200,000 or less. 1040ez forms and instructions You use the cash method of accounting and do not account for inventories. 1040ez forms and instructions Example 1. 1040ez forms and instructions You rent construction equipment to build a storage facility. 1040ez forms and instructions If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. 1040ez forms and instructions You recover your cost by claiming a deduction for depreciation on the building. 1040ez forms and instructions Example 2. 1040ez forms and instructions You rent space in a facility to conduct your business of manufacturing tools. 1040ez forms and instructions If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. 1040ez forms and instructions More information. 1040ez forms and instructions   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. 1040ez forms and instructions Prev  Up  Next   Home   More Online Publications
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The 1040ez Forms And Instructions

1040ez forms and instructions 6. 1040ez forms and instructions   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. 1040ez forms and instructions Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. 1040ez forms and instructions Also use basis to figure depreciation, amortization, depletion, and casualty losses. 1040ez forms and instructions If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. 1040ez forms and instructions Only the basis allocated to the business or investment use of the property can be depreciated. 1040ez forms and instructions Your original basis in property is adjusted (increased or decreased) by certain events. 1040ez forms and instructions For example, if you make improvements to the property, increase your basis. 1040ez forms and instructions If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. 1040ez forms and instructions Keep accurate records of all items that affect the basis of your assets. 1040ez forms and instructions For information on keeping records, see chapter 1. 1040ez forms and instructions 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. 1040ez forms and instructions Cost Basis The basis of property you buy is usually its cost. 1040ez forms and instructions Cost is the amount you pay in cash, debt obligations, other property, or services. 1040ez forms and instructions Your cost includes amounts you pay for sales tax, freight, installation, and testing. 1040ez forms and instructions The basis of real estate and business assets will include other items, discussed later. 1040ez forms and instructions Basis generally does not include interest payments. 1040ez forms and instructions However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. 1040ez forms and instructions You also may have to capitalize (add to basis) certain other costs related to buying or producing property. 1040ez forms and instructions Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. 1040ez forms and instructions Loans with low or no interest. 1040ez forms and instructions   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. 1040ez forms and instructions You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040ez forms and instructions See the discussion of unstated interest in Publication 537, Installment Sales. 1040ez forms and instructions Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. 1040ez forms and instructions If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. 1040ez forms and instructions Some of these expenses are discussed next. 1040ez forms and instructions Lump sum purchase. 1040ez forms and instructions   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. 1040ez forms and instructions Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. 1040ez forms and instructions Figure the basis of each asset by multiplying the lump sum by a fraction. 1040ez forms and instructions The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040ez forms and instructions Fair market value (FMV). 1040ez forms and instructions   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. 1040ez forms and instructions Sales of similar property on or about the same date may help in figuring the FMV of the property. 1040ez forms and instructions 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. 1040ez forms and instructions Real estate taxes. 1040ez forms and instructions   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. 1040ez forms and instructions   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. 1040ez forms and instructions Whether or not you reimburse the seller, do not include that amount in the basis of your property. 1040ez forms and instructions Settlement costs. 1040ez forms and instructions   Your basis includes the settlement fees and closing costs for buying the property. 1040ez forms and instructions See Publication 551 for a detailed list of items you can and cannot include in basis. 1040ez forms and instructions   Do not include fees and costs for getting a loan on the property. 1040ez forms and instructions Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040ez forms and instructions Points. 1040ez forms and instructions   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. 1040ez forms and instructions You may be able to deduct the points currently or over the term of the loan. 1040ez forms and instructions For more information about deducting points, see Points in chapter 4 of Publication 535. 1040ez forms and instructions Assumption of a mortgage. 1040ez forms and instructions   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. 1040ez forms and instructions Example. 1040ez forms and instructions If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. 1040ez forms and instructions Constructing assets. 1040ez forms and instructions   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040ez forms and instructions 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. 1040ez forms and instructions   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. 1040ez forms and instructions You must capitalize them (include them in the asset's basis). 1040ez forms and instructions Employee wages paid for the construction work, reduced by any employment credits allowed. 1040ez forms and instructions Depreciation on equipment you own while it is used in the construction. 1040ez forms and instructions Operating and maintenance costs for equipment used in the construction. 1040ez forms and instructions The cost of business supplies and materials used in the construction. 1040ez forms and instructions    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. 1040ez forms and instructions 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. 1040ez forms and instructions To determine the basis of these assets or separate items, there must be an allocation of basis. 1040ez forms and instructions Group of assets acquired. 1040ez forms and instructions   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. 1040ez forms and instructions Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040ez forms and instructions You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. 1040ez forms and instructions 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. 1040ez forms and instructions Farming business acquired. 1040ez forms and instructions   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. 1040ez forms and instructions Generally, reduce the purchase price by any cash received. 1040ez forms and instructions 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. 1040ez forms and instructions See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. 1040ez forms and instructions Transplanted embryo. 1040ez forms and instructions   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. 1040ez forms and instructions Allocate the rest of the purchase price to the basis of the calf. 1040ez forms and instructions Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. 1040ez forms and instructions 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. 1040ez forms and instructions You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040ez forms and instructions 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. 1040ez forms and instructions 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. 1040ez forms and instructions You produce property if you construct, build, install, manufacture, develop, improve, or create the property. 1040ez forms and instructions You are not subject to the uniform capitalization rules if the property is produced for personal use. 1040ez forms and instructions In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. 1040ez forms and instructions Plants. 1040ez forms and instructions   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. 1040ez forms and instructions Animals. 1040ez forms and instructions   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. 1040ez forms and instructions The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. 1040ez forms and instructions Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. 1040ez forms and instructions For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. 1040ez forms and instructions For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. 1040ez forms and instructions Exceptions. 1040ez forms and instructions   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. 1040ez forms and instructions   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. 1040ez forms and instructions See Accrual Method Required under Accounting Methods in chapter 2. 1040ez forms and instructions   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. 1040ez forms and instructions If you make this election, special rules apply. 1040ez forms and instructions This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. 1040ez forms and instructions 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. 1040ez forms and instructions    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. 1040ez forms and instructions See chapter 7, for additional information on depreciation. 1040ez forms and instructions Example. 1040ez forms and instructions You grow trees that have a preproductive period of more than 2 years. 1040ez forms and instructions The trees produce an annual crop. 1040ez forms and instructions You are an individual and the uniform capitalization rules apply to your farming business. 1040ez forms and instructions You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. 1040ez forms and instructions You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. 1040ez forms and instructions Preproductive period of more than 2 years. 1040ez forms and instructions   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. 1040ez forms and instructions Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. 1040ez forms and instructions Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. 1040ez forms and instructions More information. 1040ez forms and instructions   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. 1040ez forms and instructions 263A-4. 1040ez forms and instructions Table 6-1. 1040ez forms and instructions 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. 1040ez forms and instructions 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. 1040ez forms and instructions 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. 1040ez forms and instructions Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040ez forms and instructions These include the cost of any improvements having a useful life of more than 1 year. 1040ez forms and instructions The following costs increase the basis of property. 1040ez forms and instructions The cost of extending utility service lines to property. 1040ez forms and instructions Legal fees, such as the cost of defending and perfecting title. 1040ez forms and instructions Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. 1040ez forms and instructions Assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040ez forms and instructions Do not deduct these expenses as taxes. 1040ez forms and instructions However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. 1040ez forms and instructions 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. 1040ez forms and instructions See chapter 7. 1040ez forms and instructions Deducting vs. 1040ez forms and instructions capitalizing costs. 1040ez forms and instructions   Do not add to your basis costs you can deduct as current expenses. 1040ez forms and instructions For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. 1040ez forms and instructions However, you can elect either to deduct or to capitalize certain other costs. 1040ez forms and instructions See chapter 7 in Publication 535. 1040ez forms and instructions Decreases to Basis The following are some items that reduce the basis of property. 1040ez forms and instructions Section 179 deduction. 1040ez forms and instructions Deductions previously allowed or allowable for amortization, depreciation, and depletion. 1040ez forms and instructions Alternative motor vehicle credit. 1040ez forms and instructions See Form 8910. 1040ez forms and instructions Alternative fuel vehicle refueling property credit. 1040ez forms and instructions See Form 8911. 1040ez forms and instructions Residential energy efficient property credits. 1040ez forms and instructions See Form 5695. 1040ez forms and instructions Investment credit (part or all) taken. 1040ez forms and instructions Casualty and theft losses and insurance reimbursements. 1040ez forms and instructions Payments you receive for granting an easement. 1040ez forms and instructions Exclusion from income of subsidies for energy conservation measures. 1040ez forms and instructions Certain canceled debt excluded from income. 1040ez forms and instructions Rebates from a manufacturer or seller. 1040ez forms and instructions Patronage dividends received from a cooperative association as a result of a purchase of property. 1040ez forms and instructions See Patronage Dividends in chapter 3. 1040ez forms and instructions Gas-guzzler tax. 1040ez forms and instructions See Form 6197. 1040ez forms and instructions Some of these items are discussed next. 1040ez forms and instructions For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. 1040ez forms and instructions Depreciation and section 179 deduction. 1040ez forms and instructions   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. 1040ez forms and instructions For more information on these deductions, see chapter 7. 1040ez forms and instructions Section 179 deduction. 1040ez forms and instructions   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. 1040ez forms and instructions Depreciation. 1040ez forms and instructions   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. 1040ez forms and instructions 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. 1040ez forms and instructions If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040ez forms and instructions   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. 1040ez forms and instructions   See chapter 7 for information on figuring the depreciation you should have claimed. 1040ez forms and instructions   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. 1040ez forms and instructions Casualty and theft losses. 1040ez forms and instructions   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. 1040ez forms and instructions Also, decrease it by any deductible loss not covered by insurance. 1040ez forms and instructions See chapter 11 for information about figuring your casualty or theft loss. 1040ez forms and instructions   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. 1040ez forms and instructions To make this determination, compare the repaired property to the property before the casualty. 1040ez forms and instructions Easements. 1040ez forms and instructions   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. 1040ez forms and instructions It reduces the basis of the affected part of the property. 1040ez forms and instructions 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. 1040ez forms and instructions See Easements and rights-of-way in chapter 3. 1040ez forms and instructions Exclusion from income of subsidies for energy conservation measures. 1040ez forms and instructions   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. 1040ez forms and instructions Reduce the basis of the property by the excluded amount. 1040ez forms and instructions Canceled debt excluded from income. 1040ez forms and instructions   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. 1040ez forms and instructions A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040ez forms and instructions   You can exclude your canceled debt from income if the debt is any of the following. 1040ez forms and instructions Debt canceled in a bankruptcy case or when you are insolvent. 1040ez forms and instructions Qualified farm debt. 1040ez forms and instructions Qualified real property business debt (provided you are not a C corporation). 1040ez forms and instructions Qualified principal residence indebtedness. 1040ez forms and instructions Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. 1040ez forms and instructions If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040ez forms and instructions If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. 1040ez forms and instructions   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. 1040ez forms and instructions For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. 1040ez forms and instructions For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. 1040ez forms and instructions For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 1040ez forms and instructions Basis Other Than Cost There are times when you cannot use cost as basis. 1040ez forms and instructions In these situations, the fair market value or the adjusted basis of property may be used. 1040ez forms and instructions Examples are discussed next. 1040ez forms and instructions Property changed from personal to business or rental use. 1040ez forms and instructions   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. 1040ez forms and instructions 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. 1040ez forms and instructions   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. 1040ez forms and instructions   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. 1040ez forms and instructions The basis for figuring a gain is your adjusted basis in the property when you sell the property. 1040ez forms and instructions 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. 1040ez forms and instructions Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . 1040ez forms and instructions Property received for services. 1040ez forms and instructions   If you receive property for services, include the property's FMV in income. 1040ez forms and instructions The amount you include in income becomes your basis. 1040ez forms and instructions 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. 1040ez forms and instructions Example. 1040ez forms and instructions George Smith is an accountant and also operates a farming business. 1040ez forms and instructions George agreed to do some accounting work for his neighbor in exchange for a dairy cow. 1040ez forms and instructions The accounting work and the cow are each worth $1,500. 1040ez forms and instructions George must include $1,500 in income for his accounting services. 1040ez forms and instructions George's basis in the cow is $1,500. 1040ez forms and instructions Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. 1040ez forms and instructions A taxable gain or deductible loss also is known as a recognized gain or loss. 1040ez forms and instructions A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. 1040ez forms and instructions 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. 1040ez forms and instructions Example. 1040ez forms and instructions You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. 1040ez forms and instructions You must report a taxable gain of $4,000 for the land. 1040ez forms and instructions The tractor has a basis of $6,000. 1040ez forms and instructions 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. 1040ez forms and instructions Similar or related property. 1040ez forms and instructions   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. 1040ez forms and instructions However, make the following adjustments. 1040ez forms and instructions Decrease the basis by the following amounts. 1040ez forms and instructions Any loss you recognize on the involuntary conversion. 1040ez forms and instructions Any money you receive that you do not spend on similar property. 1040ez forms and instructions Increase the basis by the following amounts. 1040ez forms and instructions Any gain you recognize on the involuntary conversion. 1040ez forms and instructions Any cost of acquiring the replacement property. 1040ez forms and instructions Money or property not similar or related. 1040ez forms and instructions   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. 1040ez forms and instructions Allocating the basis. 1040ez forms and instructions   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040ez forms and instructions Basis for depreciation. 1040ez forms and instructions   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. 1040ez forms and instructions For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 1040ez forms and instructions For more information about involuntary conversions, see chapter 11. 1040ez forms and instructions Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040ez forms and instructions A nontaxable gain or loss also is known as an unrecognized gain or loss. 1040ez forms and instructions If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040ez forms and instructions Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040ez forms and instructions 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. 1040ez forms and instructions There must also be an exchange of like-kind property. 1040ez forms and instructions For more information, see Like-Kind Exchanges in  chapter 8. 1040ez forms and instructions The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. 1040ez forms and instructions Example 1. 1040ez forms and instructions You traded a truck you used in your farming business for a new smaller truck to use in farming. 1040ez forms and instructions The adjusted basis of the old truck was $10,000. 1040ez forms and instructions The FMV of the new truck is $30,000. 1040ez forms and instructions 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. 1040ez forms and instructions Example 2. 1040ez forms and instructions You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). 1040ez forms and instructions You use both the field cultivator and the planter in your farming business. 1040ez forms and instructions The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. 1040ez forms and instructions   Exchange expenses generally are the closing costs that you pay. 1040ez forms and instructions They include such items as brokerage commissions, attorney fees, and deed preparation fees. 1040ez forms and instructions Add them to the basis of the like-kind property you receive. 1040ez forms and instructions Property plus cash. 1040ez forms and instructions   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. 1040ez forms and instructions Example. 1040ez forms and instructions You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. 1040ez forms and instructions Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). 1040ez forms and instructions Special rules for related persons. 1040ez forms and instructions   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. 1040ez forms and instructions 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. 1040ez forms and instructions Each person reports it on the tax return filed for the year in which the later disposition occurred. 1040ez forms and instructions If this rule applies, the basis of the property received in the original exchange will be its FMV. 1040ez forms and instructions For more information, see chapter 8. 1040ez forms and instructions Exchange of business property. 1040ez forms and instructions   Exchanging the property of one business for the property of another business generally is a multiple property exchange. 1040ez forms and instructions For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040ez forms and instructions Basis for depreciation. 1040ez forms and instructions   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. 1040ez forms and instructions For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 1040ez forms and instructions Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. 1040ez forms and instructions The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. 1040ez forms and instructions Decrease the basis by the following amounts. 1040ez forms and instructions Any money you receive. 1040ez forms and instructions Any loss you recognize on the exchange. 1040ez forms and instructions Increase the basis by the following amounts. 1040ez forms and instructions Any additional costs you incur. 1040ez forms and instructions Any gain you recognize on the exchange. 1040ez forms and instructions If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040ez forms and instructions Example 1. 1040ez forms and instructions You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. 1040ez forms and instructions You realize a gain of $40,000. 1040ez forms and instructions 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). 1040ez forms and instructions Include your gain in income (recognize gain) only to the extent of the cash received. 1040ez forms and instructions Your basis in the land you received is figured as follows. 1040ez forms and instructions 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. 1040ez forms and instructions You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. 1040ez forms and instructions You realize a gain of $7,250. 1040ez forms and instructions 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). 1040ez forms and instructions You include all the gain in your income (recognize gain) because the gain is less than the cash you received. 1040ez forms and instructions Your basis in the truck you received is figured as follows. 1040ez forms and instructions 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. 1040ez forms and instructions   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. 1040ez forms and instructions The rest is the basis of the like-kind property. 1040ez forms and instructions Example. 1040ez forms and instructions You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. 1040ez forms and instructions You also received $1,000 cash and a truck that had an FMV of $3,000. 1040ez forms and instructions The truck is unlike property. 1040ez forms and instructions You realized a gain of $1,500. 1040ez forms and instructions 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). 1040ez forms and instructions 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. 1040ez forms and instructions Your basis in the properties you received is figured as follows. 1040ez forms and instructions 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). 1040ez forms and instructions This is the truck's FMV. 1040ez forms and instructions The rest ($12,500) is the basis of the tractor. 1040ez forms and instructions 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. 1040ez forms and instructions Example. 1040ez forms and instructions You used a tractor on your farm for 3 years. 1040ez forms and instructions Its adjusted basis is $22,000 and its FMV is $40,000. 1040ez forms and instructions You are interested in a new tractor, which sells for $60,000. 1040ez forms and instructions Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. 1040ez forms and instructions Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). 1040ez forms and instructions 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. 1040ez forms and instructions 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). 1040ez forms and instructions Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. 1040ez forms and instructions 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. 1040ez forms and instructions You also must know its FMV at the time it was given to you and any gift tax paid on it. 1040ez forms and instructions FMV equal to or greater than donor's adjusted basis. 1040ez forms and instructions   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. 1040ez forms and instructions Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040ez forms and instructions   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. 1040ez forms and instructions See Adjusted Basis , earlier. 1040ez forms and instructions   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. 1040ez forms and instructions Figure the increase by multiplying the gift tax paid by the following fraction. 1040ez forms and instructions 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. 1040ez forms and instructions 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. 1040ez forms and instructions Example. 1040ez forms and instructions In 2013, you received a gift of property from your mother that had an FMV of $50,000. 1040ez forms and instructions Her adjusted basis was $20,000. 1040ez forms and instructions The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). 1040ez forms and instructions She paid a gift tax of $7,320. 1040ez forms and instructions Your basis, $26,076, is figured as follows. 1040ez forms and instructions 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) × . 1040ez forms and instructions 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. 1040ez forms and instructions If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. 1040ez forms and instructions However, your basis cannot exceed the FMV of the gift when it was given to you. 1040ez forms and instructions FMV less than donor's adjusted basis. 1040ez forms and instructions   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. 1040ez forms and instructions Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 1040ez forms and instructions 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. 1040ez forms and instructions (See Adjusted Basis , earlier. 1040ez forms and instructions )   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. 1040ez forms and instructions Example. 1040ez forms and instructions You received farmland as a gift from your parents when they retired from farming. 1040ez forms and instructions At the time of the gift, the land had an FMV of $80,000. 1040ez forms and instructions Your parents' adjusted basis was $100,000. 1040ez forms and instructions After you received the land, no events occurred that would increase or decrease your basis. 1040ez forms and instructions 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. 1040ez forms and instructions 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. 1040ez forms and instructions If the sales price is between $80,000 and $100,000, you have neither gain nor loss. 1040ez forms and instructions 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. 1040ez forms and instructions If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. 1040ez forms and instructions Business property. 1040ez forms and instructions   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. 1040ez forms and instructions 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. 1040ez forms and instructions The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. 1040ez forms and instructions 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. 1040ez forms and instructions 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. 1040ez forms and instructions For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. 1040ez forms and instructions 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. 1040ez forms and instructions If a federal estate return is filed, you can use its appraised value. 1040ez forms and instructions The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. 1040ez forms and instructions For information on the alternate valuation, see the Instructions for Form 706. 1040ez forms and instructions 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. 1040ez forms and instructions 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. 1040ez forms and instructions Special-use valuation method. 1040ez forms and instructions   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. 1040ez forms and instructions If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. 1040ez forms and instructions 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. 1040ez forms and instructions The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040ez forms and instructions   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. 1040ez forms and instructions 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. 1040ez forms and instructions Figure all FMVs without regard to the special-use valuation. 1040ez forms and instructions   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. 1040ez forms and instructions 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. 1040ez forms and instructions The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. 1040ez forms and instructions   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040ez forms and instructions 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. 1040ez forms and instructions 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. 1040ez forms and instructions The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. 1040ez forms and instructions   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. 1040ez forms and instructions   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. 1040ez forms and instructions Property inherited from a decedent who died in 2010. 1040ez forms and instructions   If you inherited property from a decedent who died in 2010, different rules may apply. 1040ez forms and instructions See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. 1040ez forms and instructions 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. 1040ez forms and instructions Partner's basis. 1040ez forms and instructions   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. 1040ez forms and instructions 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. 1040ez forms and instructions For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. 1040ez forms and instructions Shareholder's basis. 1040ez forms and instructions   The basis of property distributed by a corporation to a shareholder is its fair market value. 1040ez forms and instructions For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 1040ez forms and instructions Prev  Up  Next   Home   More Online Publications