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Free 2009 Tax Software

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Free 2009 tax software 13. Free 2009 tax software   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Free 2009 tax software It is divided into the following sections. Free 2009 tax software Cost basis. Free 2009 tax software Adjusted basis. Free 2009 tax software Basis other than cost. Free 2009 tax software Your basis is the amount of your investment in property for tax purposes. Free 2009 tax software Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Free 2009 tax software Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Free 2009 tax software If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Free 2009 tax software Only the basis allocated to the business or investment use of the property can be depreciated. Free 2009 tax software Your original basis in property is adjusted (increased or decreased) by certain events. Free 2009 tax software For example, if you make improvements to the property, increase your basis. Free 2009 tax software If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Free 2009 tax software Keep accurate records of all items that affect the basis of your property. Free 2009 tax software For more information on keeping records, see chapter 1. Free 2009 tax software Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Free 2009 tax software The cost is the amount you pay in cash, debt obligations, other property, or services. Free 2009 tax software Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). Free 2009 tax software In addition, the basis of real estate and business assets may include other items. Free 2009 tax software Loans with low or no interest. Free 2009 tax software    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. Free 2009 tax software You generally have unstated interest if your interest rate is less than the applicable federal rate. Free 2009 tax software   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Free 2009 tax software Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Free 2009 tax software If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Free 2009 tax software Lump sum purchase. Free 2009 tax software   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Free 2009 tax software Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Free 2009 tax software Figure the basis of each asset by multiplying the lump sum by a fraction. Free 2009 tax software The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Free 2009 tax software    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Free 2009 tax software Fair market value (FMV). Free 2009 tax software   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Free 2009 tax software Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Free 2009 tax software Assumption of mortgage. Free 2009 tax software   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Free 2009 tax software Settlement costs. Free 2009 tax software   Your basis includes the settlement fees and closing costs you paid for buying the property. Free 2009 tax software (A fee for buying property is a cost that must be paid even if you buy the property for cash. Free 2009 tax software ) Do not include fees and costs for getting a loan on the property in your basis. Free 2009 tax software   The following are some of the settlement fees or closing costs you can include in the basis of your property. Free 2009 tax software Abstract fees (abstract of title fees). Free 2009 tax software Charges for installing utility services. Free 2009 tax software Legal fees (including fees for the title search and preparation of the sales contract and deed). Free 2009 tax software Recording fees. Free 2009 tax software Survey fees. Free 2009 tax software Transfer taxes. Free 2009 tax software Owner's title insurance. Free 2009 tax software Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Free 2009 tax software   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free 2009 tax software   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Free 2009 tax software Casualty insurance premiums. Free 2009 tax software Rent for occupancy of the property before closing. Free 2009 tax software Charges for utilities or other services related to occupancy of the property before closing. Free 2009 tax software Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Free 2009 tax software Fees for refinancing a mortgage. Free 2009 tax software Real estate taxes. Free 2009 tax software   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Free 2009 tax software You cannot deduct them as an expense. Free 2009 tax software    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Free 2009 tax software Do not include that amount in the basis of your property. Free 2009 tax software If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Free 2009 tax software Points. Free 2009 tax software   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Free 2009 tax software Generally, you deduct the points over the term of the loan. Free 2009 tax software For more information on how to deduct points, see chapter 23. Free 2009 tax software Points on home mortgage. Free 2009 tax software   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Free 2009 tax software If certain requirements are met, you can deduct the points in full for the year in which they are paid. Free 2009 tax software Reduce the basis of your home by any seller-paid points. Free 2009 tax software Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Free 2009 tax software The result is the adjusted basis. Free 2009 tax software Increases to Basis Increase the basis of any property by all items properly added to a capital account. Free 2009 tax software Examples of items that increase basis are shown in Table 13-1. Free 2009 tax software These include the items discussed below. Free 2009 tax software Improvements. Free 2009 tax software   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Free 2009 tax software For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. Free 2009 tax software Assessments for local improvements. Free 2009 tax software   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Free 2009 tax software Do not deduct them as taxes. Free 2009 tax software However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Free 2009 tax software Example. Free 2009 tax software Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Free 2009 tax software Add the assessment to your property's basis. Free 2009 tax software In this example, the assessment is a depreciable asset. Free 2009 tax software Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Free 2009 tax software Examples of items that decrease basis are shown in Table 13-1. Free 2009 tax software These include the items discussed below. Free 2009 tax software Table 13-1. Free 2009 tax software Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Free 2009 tax software   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Free 2009 tax software    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Free 2009 tax software   For more information on casualty and theft losses, see chapter 25. Free 2009 tax software Depreciation and section 179 deduction. Free 2009 tax software   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Free 2009 tax software   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Free 2009 tax software Example. Free 2009 tax software You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Free 2009 tax software You added an improvement to the duplex that cost $10,000. Free 2009 tax software In February last year, the duplex was damaged by fire. Free 2009 tax software Up to that time, you had been allowed depreciation of $23,000. Free 2009 tax software You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Free 2009 tax software You deducted a casualty loss of $1,000 on your income tax return for last year. Free 2009 tax software You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Free 2009 tax software You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Free 2009 tax software Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Free 2009 tax software Your basis in the land is its original cost of $5,000. Free 2009 tax software Easements. Free 2009 tax software   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Free 2009 tax software It reduces the basis of the affected part of the property. Free 2009 tax software If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Free 2009 tax software   If the gain is on a capital asset, see chapter 16 for information about how to report it. Free 2009 tax software If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Free 2009 tax software Exclusion of subsidies for energy conservation measures. Free 2009 tax software   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Free 2009 tax software Reduce the basis of the property for which you received the subsidy by the excluded amount. Free 2009 tax software For more information about this subsidy, see chapter 12. Free 2009 tax software Postponed gain from sale of home. Free 2009 tax software    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Free 2009 tax software For more information on the rules for the sale of a home, see chapter 15. Free 2009 tax software Basis Other Than Cost There are many times when you cannot use cost as basis. Free 2009 tax software In these cases, the fair market value or the adjusted basis of the property can be used. Free 2009 tax software Fair market value (FMV) and adjusted basis were discussed earlier. Free 2009 tax software Property Received for Services If you receive property for your services, include the FMV of the property in income. Free 2009 tax software The amount you include in income becomes your basis. Free 2009 tax software If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Free 2009 tax software Restricted property. Free 2009 tax software   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. Free 2009 tax software However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Free 2009 tax software Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Free 2009 tax software For more information, see Restricted Property in Publication 525. Free 2009 tax software Bargain purchases. Free 2009 tax software   A bargain purchase is a purchase of an item for less than its FMV. Free 2009 tax software If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Free 2009 tax software Your basis in the property is its FMV (your purchase price plus the amount you include in income). Free 2009 tax software   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Free 2009 tax software However, your basis in the property is still its FMV. Free 2009 tax software See Employee Discounts in Publication 15-B. Free 2009 tax software Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Free 2009 tax software A taxable gain or deductible loss also is known as a recognized gain or loss. Free 2009 tax software If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Free 2009 tax software Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Free 2009 tax software Similar or related property. Free 2009 tax software   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Free 2009 tax software Decrease the basis by the following. Free 2009 tax software Any loss you recognize on the involuntary conversion. Free 2009 tax software Any money you receive that you do not spend on similar property. Free 2009 tax software Increase the basis by the following. Free 2009 tax software Any gain you recognize on the involuntary conversion. Free 2009 tax software Any cost of acquiring the replacement property. Free 2009 tax software Money or property not similar or related. Free 2009 tax software    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. Free 2009 tax software Example. Free 2009 tax software The state condemned your property. Free 2009 tax software The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Free 2009 tax software You realized a gain of $5,000 ($31,000 − $26,000). Free 2009 tax software You bought replacement property similar in use to the converted property for $29,000. Free 2009 tax software You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Free 2009 tax software Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Free 2009 tax software The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Free 2009 tax software   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Free 2009 tax software Basis for depreciation. Free 2009 tax software   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Free 2009 tax software For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Free 2009 tax software Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Free 2009 tax software If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Free 2009 tax software See Nontaxable Trades in chapter 14. Free 2009 tax software Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Free 2009 tax software To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Free 2009 tax software Qualifying property. Free 2009 tax software Like-kind property. Free 2009 tax software The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Free 2009 tax software If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Free 2009 tax software Qualifying property. Free 2009 tax software   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Free 2009 tax software Like-kind property. Free 2009 tax software   There must be an exchange of like-kind property. Free 2009 tax software Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Free 2009 tax software The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Free 2009 tax software Example. Free 2009 tax software You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Free 2009 tax software The dealer allows you $2,000 on the old truck, and you pay $4,800. Free 2009 tax software This is a like-kind exchange. Free 2009 tax software The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Free 2009 tax software If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Free 2009 tax software The basis of the new truck is the price you pay the dealer. Free 2009 tax software Partially nontaxable exchanges. Free 2009 tax software   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Free 2009 tax software The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Free 2009 tax software Decrease the basis by the following amounts. Free 2009 tax software Any money you receive. Free 2009 tax software Any loss you recognize on the exchange. Free 2009 tax software Increase the basis by the following amounts. Free 2009 tax software Any additional costs you incur. Free 2009 tax software Any gain you recognize on the exchange. Free 2009 tax software If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Free 2009 tax software Allocation of basis. Free 2009 tax software   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Free 2009 tax software The rest is the basis of the like-kind property. Free 2009 tax software More information. Free 2009 tax software   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Free 2009 tax software Basis for depreciation. Free 2009 tax software   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Free 2009 tax software For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Free 2009 tax software Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Free 2009 tax software The same rule applies to a transfer by your former spouse that is incident to divorce. Free 2009 tax software However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Free 2009 tax software If the property transferred to you is a series E, series EE, or series I U. Free 2009 tax software S. Free 2009 tax software savings bond, the transferor must include in income the interest accrued to the date of transfer. Free 2009 tax software Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Free 2009 tax software For more information on these bonds, see chapter 7. Free 2009 tax software At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Free 2009 tax software For more information about the transfer of property from a spouse, see chapter 14. Free 2009 tax software Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Free 2009 tax software FMV less than donor's adjusted basis. Free 2009 tax software   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Free 2009 tax software Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Free 2009 tax software Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Free 2009 tax software See Adjusted Basis , earlier. Free 2009 tax software Example. Free 2009 tax software You received an acre of land as a gift. Free 2009 tax software At the time of the gift, the land had an FMV of $8,000. Free 2009 tax software The donor's adjusted basis was $10,000. Free 2009 tax software After you received the property, no events occurred to increase or decrease your basis. Free 2009 tax software If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Free 2009 tax software If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Free 2009 tax software If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Free 2009 tax software Business property. Free 2009 tax software   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Free 2009 tax software FMV equal to or greater than donor's adjusted basis. Free 2009 tax software   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Free 2009 tax software Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Free 2009 tax software   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Free 2009 tax software See Adjusted Basis , earlier. Free 2009 tax software   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Free 2009 tax software Figure the increase by multiplying the gift tax paid by a fraction. Free 2009 tax software The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Free 2009 tax software   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Free 2009 tax software The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Free 2009 tax software Example. Free 2009 tax software In 2013, you received a gift of property from your mother that had an FMV of $50,000. Free 2009 tax software Her adjusted basis was $20,000. Free 2009 tax software The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Free 2009 tax software She paid a gift tax of $7,320 on the property. Free 2009 tax software Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Free 2009 tax software 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Free 2009 tax software If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Free 2009 tax software However, your basis cannot exceed the FMV of the gift at the time it was given to you. Free 2009 tax software Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Free 2009 tax software The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Free 2009 tax software The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Free 2009 tax software The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Free 2009 tax software If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Free 2009 tax software For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Free 2009 tax software Property inherited from a decedent who died in 2010. Free 2009 tax software   If you inherited property from a decedent who died in 2010, special rules may apply. Free 2009 tax software For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free 2009 tax software Community property. Free 2009 tax software   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Free 2009 tax software When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Free 2009 tax software For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Free 2009 tax software Example. Free 2009 tax software You and your spouse owned community property that had a basis of $80,000. Free 2009 tax software When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Free 2009 tax software The FMV of the community interest was $100,000. Free 2009 tax software The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Free 2009 tax software The basis of the other half to your spouse's heirs is also $50,000. Free 2009 tax software For more information about community property, see Publication 555, Community Property. Free 2009 tax software Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. Free 2009 tax software To do so, you must figure its basis for depreciation at the time of the change. Free 2009 tax software An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Free 2009 tax software Basis for depreciation. Free 2009 tax software   The basis for depreciation is the lesser of the following amounts. Free 2009 tax software The FMV of the property on the date of the change. Free 2009 tax software Your adjusted basis on the date of the change. Free 2009 tax software Example. Free 2009 tax software Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Free 2009 tax software You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Free 2009 tax software Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Free 2009 tax software Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Free 2009 tax software On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Free 2009 tax software The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Free 2009 tax software Sale of property. Free 2009 tax software   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Free 2009 tax software Gain. Free 2009 tax software   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Free 2009 tax software Example. Free 2009 tax software Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Free 2009 tax software Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Free 2009 tax software Loss. Free 2009 tax software   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Free 2009 tax software Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Free 2009 tax software Example. Free 2009 tax software Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Free 2009 tax software In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Free 2009 tax software Reduce that amount ($180,000) by the depreciation deductions ($37,500). Free 2009 tax software The basis for loss is $142,500 ($180,000 − $37,500). Free 2009 tax software Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Free 2009 tax software If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Free 2009 tax software You must adjust the basis of stocks for certain events that occur after purchase. Free 2009 tax software For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Free 2009 tax software This rule applies only when the additional stock received is identical to the stock held. Free 2009 tax software Also reduce your basis when you receive nontaxable distributions. Free 2009 tax software They are a return of capital. Free 2009 tax software Example. Free 2009 tax software In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Free 2009 tax software In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Free 2009 tax software In 2013 XYZ declared a 2-for-1 stock split. Free 2009 tax software You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Free 2009 tax software Other basis. Free 2009 tax software   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Free 2009 tax software For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Free 2009 tax software Identifying stocks or bonds sold. Free 2009 tax software   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. Free 2009 tax software If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Free 2009 tax software For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Free 2009 tax software Mutual fund shares. Free 2009 tax software   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Free 2009 tax software For more information, see Publication 550. Free 2009 tax software Bond premium. Free 2009 tax software   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Free 2009 tax software See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Free 2009 tax software Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Free 2009 tax software Original issue discount (OID) on debt instruments. Free 2009 tax software   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Free 2009 tax software See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Free 2009 tax software Tax-exempt obligations. Free 2009 tax software    OID on tax-exempt obligations is generally not taxable. Free 2009 tax software However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Free 2009 tax software The accrued OID is added to the basis of the obligation to determine your gain or loss. Free 2009 tax software See chapter 4 of Publication 550. Free 2009 tax software Prev  Up  Next   Home   More Online Publications