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