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Back taxes help 13. Back taxes help   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Back taxes help It is divided into the following sections. Back taxes help Cost basis. Back taxes help Adjusted basis. Back taxes help Basis other than cost. Back taxes help Your basis is the amount of your investment in property for tax purposes. Back taxes help Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Back taxes help Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Back taxes help If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Back taxes help Only the basis allocated to the business or investment use of the property can be depreciated. Back taxes help Your original basis in property is adjusted (increased or decreased) by certain events. Back taxes help For example, if you make improvements to the property, increase your basis. Back taxes help If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Back taxes help Keep accurate records of all items that affect the basis of your property. Back taxes help For more information on keeping records, see chapter 1. Back taxes help Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Back taxes help The cost is the amount you pay in cash, debt obligations, other property, or services. Back taxes help Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). Back taxes help In addition, the basis of real estate and business assets may include other items. Back taxes help Loans with low or no interest. Back taxes help    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. Back taxes help You generally have unstated interest if your interest rate is less than the applicable federal rate. Back taxes help   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Back taxes help Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Back taxes help If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Back taxes help Lump sum purchase. Back taxes help   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Back taxes help Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Back taxes help Figure the basis of each asset by multiplying the lump sum by a fraction. Back taxes help The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Back taxes help    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Back taxes help Fair market value (FMV). Back taxes help   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Back taxes help Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Back taxes help Assumption of mortgage. Back taxes help   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Back taxes help Settlement costs. Back taxes help   Your basis includes the settlement fees and closing costs you paid for buying the property. Back taxes help (A fee for buying property is a cost that must be paid even if you buy the property for cash. Back taxes help ) Do not include fees and costs for getting a loan on the property in your basis. Back taxes help   The following are some of the settlement fees or closing costs you can include in the basis of your property. Back taxes help Abstract fees (abstract of title fees). Back taxes help Charges for installing utility services. Back taxes help Legal fees (including fees for the title search and preparation of the sales contract and deed). Back taxes help Recording fees. Back taxes help Survey fees. Back taxes help Transfer taxes. Back taxes help Owner's title insurance. Back taxes help Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Back taxes help   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Back taxes help   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Back taxes help Casualty insurance premiums. Back taxes help Rent for occupancy of the property before closing. Back taxes help Charges for utilities or other services related to occupancy of the property before closing. Back taxes help Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Back taxes help Fees for refinancing a mortgage. Back taxes help Real estate taxes. Back taxes help   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Back taxes help You cannot deduct them as an expense. Back taxes help    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Back taxes help Do not include that amount in the basis of your property. Back taxes help If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Back taxes help Points. Back taxes help   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Back taxes help Generally, you deduct the points over the term of the loan. Back taxes help For more information on how to deduct points, see chapter 23. Back taxes help Points on home mortgage. Back taxes help   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Back taxes help If certain requirements are met, you can deduct the points in full for the year in which they are paid. Back taxes help Reduce the basis of your home by any seller-paid points. Back taxes help Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Back taxes help The result is the adjusted basis. Back taxes help Increases to Basis Increase the basis of any property by all items properly added to a capital account. Back taxes help Examples of items that increase basis are shown in Table 13-1. Back taxes help These include the items discussed below. Back taxes help Improvements. Back taxes help   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Back taxes help For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. Back taxes help Assessments for local improvements. Back taxes help   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Back taxes help Do not deduct them as taxes. Back taxes help However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Back taxes help Example. Back taxes help Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Back taxes help Add the assessment to your property's basis. Back taxes help In this example, the assessment is a depreciable asset. Back taxes help Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Back taxes help Examples of items that decrease basis are shown in Table 13-1. Back taxes help These include the items discussed below. Back taxes help Table 13-1. Back taxes help Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Back taxes help   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Back taxes help    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Back taxes help   For more information on casualty and theft losses, see chapter 25. Back taxes help Depreciation and section 179 deduction. Back taxes help   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Back taxes help   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Back taxes help Example. Back taxes help You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Back taxes help You added an improvement to the duplex that cost $10,000. Back taxes help In February last year, the duplex was damaged by fire. Back taxes help Up to that time, you had been allowed depreciation of $23,000. Back taxes help You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Back taxes help You deducted a casualty loss of $1,000 on your income tax return for last year. Back taxes help You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Back taxes help You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Back taxes help Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Back taxes help Your basis in the land is its original cost of $5,000. Back taxes help Easements. Back taxes help   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Back taxes help It reduces the basis of the affected part of the property. Back taxes help 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. Back taxes help   If the gain is on a capital asset, see chapter 16 for information about how to report it. Back taxes help If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Back taxes help Exclusion of subsidies for energy conservation measures. Back taxes help   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. Back taxes help Reduce the basis of the property for which you received the subsidy by the excluded amount. Back taxes help For more information about this subsidy, see chapter 12. Back taxes help Postponed gain from sale of home. Back taxes help    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Back taxes help For more information on the rules for the sale of a home, see chapter 15. Back taxes help Basis Other Than Cost There are many times when you cannot use cost as basis. Back taxes help In these cases, the fair market value or the adjusted basis of the property can be used. Back taxes help Fair market value (FMV) and adjusted basis were discussed earlier. Back taxes help Property Received for Services If you receive property for your services, include the FMV of the property in income. Back taxes help The amount you include in income becomes your basis. Back taxes help 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. Back taxes help Restricted property. Back taxes help   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. Back taxes help However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Back taxes help Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Back taxes help For more information, see Restricted Property in Publication 525. Back taxes help Bargain purchases. Back taxes help   A bargain purchase is a purchase of an item for less than its FMV. Back taxes help If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Back taxes help Your basis in the property is its FMV (your purchase price plus the amount you include in income). Back taxes help   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Back taxes help However, your basis in the property is still its FMV. Back taxes help See Employee Discounts in Publication 15-B. Back taxes help Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Back taxes help A taxable gain or deductible loss also is known as a recognized gain or loss. Back taxes help 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. Back taxes help Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Back taxes help Similar or related property. Back taxes help   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Back taxes help Decrease the basis by the following. Back taxes help Any loss you recognize on the involuntary conversion. Back taxes help Any money you receive that you do not spend on similar property. Back taxes help Increase the basis by the following. Back taxes help Any gain you recognize on the involuntary conversion. Back taxes help Any cost of acquiring the replacement property. Back taxes help Money or property not similar or related. Back taxes help    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. Back taxes help Example. Back taxes help The state condemned your property. Back taxes help The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Back taxes help You realized a gain of $5,000 ($31,000 − $26,000). Back taxes help You bought replacement property similar in use to the converted property for $29,000. Back taxes help You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Back taxes help Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Back taxes help The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Back taxes help   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Back taxes help Basis for depreciation. Back taxes help   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Back taxes help For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Back taxes help Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Back taxes help If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Back taxes help See Nontaxable Trades in chapter 14. Back taxes help Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Back taxes help To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Back taxes help Qualifying property. Back taxes help Like-kind property. Back taxes help The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Back taxes help If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Back taxes help Qualifying property. Back taxes help   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Back taxes help Like-kind property. Back taxes help   There must be an exchange of like-kind property. Back taxes help Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Back taxes help The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Back taxes help Example. Back taxes help You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Back taxes help The dealer allows you $2,000 on the old truck, and you pay $4,800. Back taxes help This is a like-kind exchange. Back taxes help The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Back taxes help If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Back taxes help The basis of the new truck is the price you pay the dealer. Back taxes help Partially nontaxable exchanges. Back taxes help   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Back taxes help The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Back taxes help Decrease the basis by the following amounts. Back taxes help Any money you receive. Back taxes help Any loss you recognize on the exchange. Back taxes help Increase the basis by the following amounts. Back taxes help Any additional costs you incur. Back taxes help Any gain you recognize on the exchange. Back taxes help If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Back taxes help Allocation of basis. Back taxes help   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. Back taxes help The rest is the basis of the like-kind property. Back taxes help More information. Back taxes help   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Back taxes help Basis for depreciation. Back taxes help   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Back taxes help For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Back taxes help 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. Back taxes help The same rule applies to a transfer by your former spouse that is incident to divorce. Back taxes help 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. Back taxes help If the property transferred to you is a series E, series EE, or series I U. Back taxes help S. Back taxes help savings bond, the transferor must include in income the interest accrued to the date of transfer. Back taxes help Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Back taxes help For more information on these bonds, see chapter 7. Back taxes help At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Back taxes help For more information about the transfer of property from a spouse, see chapter 14. Back taxes help Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Back taxes help FMV less than donor's adjusted basis. Back taxes help   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. Back taxes help Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Back taxes help 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. Back taxes help See Adjusted Basis , earlier. Back taxes help Example. Back taxes help You received an acre of land as a gift. Back taxes help At the time of the gift, the land had an FMV of $8,000. Back taxes help The donor's adjusted basis was $10,000. Back taxes help After you received the property, no events occurred to increase or decrease your basis. Back taxes help If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Back taxes help If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Back taxes help If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Back taxes help Business property. Back taxes help   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. Back taxes help FMV equal to or greater than donor's adjusted basis. Back taxes help   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Back taxes help Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Back taxes help   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Back taxes help See Adjusted Basis , earlier. Back taxes help   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. Back taxes help Figure the increase by multiplying the gift tax paid by a fraction. Back taxes help The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Back taxes help   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Back taxes help 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. Back taxes help Example. Back taxes help In 2013, you received a gift of property from your mother that had an FMV of $50,000. Back taxes help Her adjusted basis was $20,000. Back taxes help The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Back taxes help She paid a gift tax of $7,320 on the property. Back taxes help Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Back taxes help 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. Back taxes help If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Back taxes help However, your basis cannot exceed the FMV of the gift at the time it was given to you. Back taxes help 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. Back taxes help The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Back taxes help The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Back taxes help The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Back taxes help 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. Back taxes help For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Back taxes help Property inherited from a decedent who died in 2010. Back taxes help   If you inherited property from a decedent who died in 2010, special rules may apply. Back taxes help For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Back taxes help Community property. Back taxes help   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Back taxes help When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Back taxes help For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Back taxes help Example. Back taxes help You and your spouse owned community property that had a basis of $80,000. Back taxes help When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Back taxes help The FMV of the community interest was $100,000. Back taxes help The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Back taxes help The basis of the other half to your spouse's heirs is also $50,000. Back taxes help For more information about community property, see Publication 555, Community Property. Back taxes help Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. Back taxes help To do so, you must figure its basis for depreciation at the time of the change. Back taxes help An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Back taxes help Basis for depreciation. Back taxes help   The basis for depreciation is the lesser of the following amounts. Back taxes help The FMV of the property on the date of the change. Back taxes help Your adjusted basis on the date of the change. Back taxes help Example. Back taxes help Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Back taxes help You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Back taxes help Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Back taxes help Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Back taxes help On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Back taxes help The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Back taxes help Sale of property. Back taxes help   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Back taxes help Gain. Back taxes help   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Back taxes help Example. Back taxes help Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Back taxes help Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Back taxes help Loss. Back taxes help   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. Back taxes help Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Back taxes help Example. Back taxes help Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Back taxes help In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Back taxes help Reduce that amount ($180,000) by the depreciation deductions ($37,500). Back taxes help The basis for loss is $142,500 ($180,000 − $37,500). Back taxes help Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Back taxes help If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Back taxes help You must adjust the basis of stocks for certain events that occur after purchase. Back taxes help For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Back taxes help This rule applies only when the additional stock received is identical to the stock held. Back taxes help Also reduce your basis when you receive nontaxable distributions. Back taxes help They are a return of capital. Back taxes help Example. Back taxes help In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Back taxes help In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Back taxes help In 2013 XYZ declared a 2-for-1 stock split. Back taxes help You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Back taxes help Other basis. Back taxes help   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Back taxes help For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Back taxes help Identifying stocks or bonds sold. Back taxes help   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. Back taxes help If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Back taxes help For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Back taxes help Mutual fund shares. Back taxes help   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Back taxes help For more information, see Publication 550. Back taxes help Bond premium. Back taxes help   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Back taxes help See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Back taxes help Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Back taxes help Original issue discount (OID) on debt instruments. Back taxes help   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Back taxes help See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Back taxes help Tax-exempt obligations. Back taxes help    OID on tax-exempt obligations is generally not taxable. Back taxes help However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Back taxes help The accrued OID is added to the basis of the obligation to determine your gain or loss. Back taxes help See chapter 4 of Publication 550. Back taxes help Prev  Up  Next   Home   More Online Publications
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Letter 3127C Frequently Asked Questions (FAQs)

What is the letter telling me?

This letter is confirming your oral or written request to make a change to your current Installment Agreement. The change can be payment amount, payment date or adding an additional liability to the agreement. The letter explains the necessary fees charged for this service.

What do I have to do?

Follow the instructions in the letter and make the change on the date provided.

How much time do I have?

The letter tells you when the change takes place.

What happens if I don't take any action?

You must continue to make your installment payments as the letter directs.

Who should I contact?

If you have any questions you may call the toll free number provided in the letter. The person who answers will assist you.

What if I don't agree or have already taken corrective action?

If you don't agree with the installment terms, you should contact us immediately. If you have already taken corrective action, you should receive a monthly reminder notice.

Page Last Reviewed or Updated: 03-Feb-2014

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