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Tax planning us 1040ez 13. Tax planning us 1040ez   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. Tax planning us 1040ez It is divided into the following sections. Tax planning us 1040ez Cost basis. Tax planning us 1040ez Adjusted basis. Tax planning us 1040ez Basis other than cost. Tax planning us 1040ez Your basis is the amount of your investment in property for tax purposes. Tax planning us 1040ez Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Tax planning us 1040ez Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Tax planning us 1040ez If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Tax planning us 1040ez Only the basis allocated to the business or investment use of the property can be depreciated. Tax planning us 1040ez Your original basis in property is adjusted (increased or decreased) by certain events. Tax planning us 1040ez For example, if you make improvements to the property, increase your basis. Tax planning us 1040ez If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Tax planning us 1040ez Keep accurate records of all items that affect the basis of your property. Tax planning us 1040ez For more information on keeping records, see chapter 1. Tax planning us 1040ez 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. Tax planning us 1040ez The cost is the amount you pay in cash, debt obligations, other property, or services. Tax planning us 1040ez 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). Tax planning us 1040ez In addition, the basis of real estate and business assets may include other items. Tax planning us 1040ez Loans with low or no interest. Tax planning us 1040ez    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. Tax planning us 1040ez You generally have unstated interest if your interest rate is less than the applicable federal rate. Tax planning us 1040ez   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Tax planning us 1040ez Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Tax planning us 1040ez If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Tax planning us 1040ez Lump sum purchase. Tax planning us 1040ez   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. Tax planning us 1040ez Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Tax planning us 1040ez Figure the basis of each asset by multiplying the lump sum by a fraction. Tax planning us 1040ez The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Tax planning us 1040ez    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. Tax planning us 1040ez Fair market value (FMV). Tax planning us 1040ez   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. Tax planning us 1040ez Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Tax planning us 1040ez Assumption of mortgage. Tax planning us 1040ez   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. Tax planning us 1040ez Settlement costs. Tax planning us 1040ez   Your basis includes the settlement fees and closing costs you paid for buying the property. Tax planning us 1040ez (A fee for buying property is a cost that must be paid even if you buy the property for cash. Tax planning us 1040ez ) Do not include fees and costs for getting a loan on the property in your basis. Tax planning us 1040ez   The following are some of the settlement fees or closing costs you can include in the basis of your property. Tax planning us 1040ez Abstract fees (abstract of title fees). Tax planning us 1040ez Charges for installing utility services. Tax planning us 1040ez Legal fees (including fees for the title search and preparation of the sales contract and deed). Tax planning us 1040ez Recording fees. Tax planning us 1040ez Survey fees. Tax planning us 1040ez Transfer taxes. Tax planning us 1040ez Owner's title insurance. Tax planning us 1040ez 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. Tax planning us 1040ez   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Tax planning us 1040ez   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Tax planning us 1040ez Casualty insurance premiums. Tax planning us 1040ez Rent for occupancy of the property before closing. Tax planning us 1040ez Charges for utilities or other services related to occupancy of the property before closing. Tax planning us 1040ez 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. Tax planning us 1040ez Fees for refinancing a mortgage. Tax planning us 1040ez Real estate taxes. Tax planning us 1040ez   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. Tax planning us 1040ez You cannot deduct them as an expense. Tax planning us 1040ez    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. Tax planning us 1040ez Do not include that amount in the basis of your property. Tax planning us 1040ez If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Tax planning us 1040ez Points. Tax planning us 1040ez   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. Tax planning us 1040ez Generally, you deduct the points over the term of the loan. Tax planning us 1040ez For more information on how to deduct points, see chapter 23. Tax planning us 1040ez Points on home mortgage. Tax planning us 1040ez   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Tax planning us 1040ez If certain requirements are met, you can deduct the points in full for the year in which they are paid. Tax planning us 1040ez Reduce the basis of your home by any seller-paid points. Tax planning us 1040ez 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. Tax planning us 1040ez The result is the adjusted basis. Tax planning us 1040ez Increases to Basis Increase the basis of any property by all items properly added to a capital account. Tax planning us 1040ez Examples of items that increase basis are shown in Table 13-1. Tax planning us 1040ez These include the items discussed below. Tax planning us 1040ez Improvements. Tax planning us 1040ez   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. Tax planning us 1040ez 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. Tax planning us 1040ez Assessments for local improvements. Tax planning us 1040ez   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Tax planning us 1040ez Do not deduct them as taxes. Tax planning us 1040ez However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Tax planning us 1040ez Example. Tax planning us 1040ez 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. Tax planning us 1040ez Add the assessment to your property's basis. Tax planning us 1040ez In this example, the assessment is a depreciable asset. Tax planning us 1040ez 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. Tax planning us 1040ez Examples of items that decrease basis are shown in Table 13-1. Tax planning us 1040ez These include the items discussed below. Tax planning us 1040ez Table 13-1. Tax planning us 1040ez 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. Tax planning us 1040ez   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. Tax planning us 1040ez    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Tax planning us 1040ez   For more information on casualty and theft losses, see chapter 25. Tax planning us 1040ez Depreciation and section 179 deduction. Tax planning us 1040ez   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. Tax planning us 1040ez   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Tax planning us 1040ez Example. Tax planning us 1040ez 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. Tax planning us 1040ez You added an improvement to the duplex that cost $10,000. Tax planning us 1040ez In February last year, the duplex was damaged by fire. Tax planning us 1040ez Up to that time, you had been allowed depreciation of $23,000. Tax planning us 1040ez You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Tax planning us 1040ez You deducted a casualty loss of $1,000 on your income tax return for last year. Tax planning us 1040ez You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Tax planning us 1040ez You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Tax planning us 1040ez 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. Tax planning us 1040ez Your basis in the land is its original cost of $5,000. Tax planning us 1040ez Easements. Tax planning us 1040ez   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Tax planning us 1040ez It reduces the basis of the affected part of the property. Tax planning us 1040ez 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. Tax planning us 1040ez   If the gain is on a capital asset, see chapter 16 for information about how to report it. Tax planning us 1040ez If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Tax planning us 1040ez Exclusion of subsidies for energy conservation measures. Tax planning us 1040ez   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. Tax planning us 1040ez Reduce the basis of the property for which you received the subsidy by the excluded amount. Tax planning us 1040ez For more information about this subsidy, see chapter 12. Tax planning us 1040ez Postponed gain from sale of home. Tax planning us 1040ez    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. Tax planning us 1040ez For more information on the rules for the sale of a home, see chapter 15. Tax planning us 1040ez Basis Other Than Cost There are many times when you cannot use cost as basis. Tax planning us 1040ez In these cases, the fair market value or the adjusted basis of the property can be used. Tax planning us 1040ez Fair market value (FMV) and adjusted basis were discussed earlier. Tax planning us 1040ez Property Received for Services If you receive property for your services, include the FMV of the property in income. Tax planning us 1040ez The amount you include in income becomes your basis. Tax planning us 1040ez 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. Tax planning us 1040ez Restricted property. Tax planning us 1040ez   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. Tax planning us 1040ez 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. Tax planning us 1040ez 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). Tax planning us 1040ez For more information, see Restricted Property in Publication 525. Tax planning us 1040ez Bargain purchases. Tax planning us 1040ez   A bargain purchase is a purchase of an item for less than its FMV. Tax planning us 1040ez 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. Tax planning us 1040ez Your basis in the property is its FMV (your purchase price plus the amount you include in income). Tax planning us 1040ez   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Tax planning us 1040ez However, your basis in the property is still its FMV. Tax planning us 1040ez See Employee Discounts in Publication 15-B. Tax planning us 1040ez Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Tax planning us 1040ez A taxable gain or deductible loss also is known as a recognized gain or loss. Tax planning us 1040ez 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. Tax planning us 1040ez 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. Tax planning us 1040ez Similar or related property. Tax planning us 1040ez   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. Tax planning us 1040ez Decrease the basis by the following. Tax planning us 1040ez Any loss you recognize on the involuntary conversion. Tax planning us 1040ez Any money you receive that you do not spend on similar property. Tax planning us 1040ez Increase the basis by the following. Tax planning us 1040ez Any gain you recognize on the involuntary conversion. Tax planning us 1040ez Any cost of acquiring the replacement property. Tax planning us 1040ez Money or property not similar or related. Tax planning us 1040ez    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. Tax planning us 1040ez Example. Tax planning us 1040ez The state condemned your property. Tax planning us 1040ez The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Tax planning us 1040ez You realized a gain of $5,000 ($31,000 − $26,000). Tax planning us 1040ez You bought replacement property similar in use to the converted property for $29,000. Tax planning us 1040ez You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Tax planning us 1040ez Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Tax planning us 1040ez 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. Tax planning us 1040ez   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Tax planning us 1040ez Basis for depreciation. Tax planning us 1040ez   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Tax planning us 1040ez For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Tax planning us 1040ez Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Tax planning us 1040ez If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Tax planning us 1040ez See Nontaxable Trades in chapter 14. Tax planning us 1040ez Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Tax planning us 1040ez To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Tax planning us 1040ez Qualifying property. Tax planning us 1040ez Like-kind property. Tax planning us 1040ez The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Tax planning us 1040ez 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. Tax planning us 1040ez Qualifying property. Tax planning us 1040ez   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. Tax planning us 1040ez Like-kind property. Tax planning us 1040ez   There must be an exchange of like-kind property. Tax planning us 1040ez Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Tax planning us 1040ez The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Tax planning us 1040ez Example. Tax planning us 1040ez You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Tax planning us 1040ez The dealer allows you $2,000 on the old truck, and you pay $4,800. Tax planning us 1040ez This is a like-kind exchange. Tax planning us 1040ez 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). Tax planning us 1040ez 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). Tax planning us 1040ez The basis of the new truck is the price you pay the dealer. Tax planning us 1040ez Partially nontaxable exchanges. Tax planning us 1040ez   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Tax planning us 1040ez The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Tax planning us 1040ez Decrease the basis by the following amounts. Tax planning us 1040ez Any money you receive. Tax planning us 1040ez Any loss you recognize on the exchange. Tax planning us 1040ez Increase the basis by the following amounts. Tax planning us 1040ez Any additional costs you incur. Tax planning us 1040ez Any gain you recognize on the exchange. Tax planning us 1040ez If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Tax planning us 1040ez Allocation of basis. Tax planning us 1040ez   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. Tax planning us 1040ez The rest is the basis of the like-kind property. Tax planning us 1040ez More information. Tax planning us 1040ez   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Tax planning us 1040ez Basis for depreciation. Tax planning us 1040ez   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Tax planning us 1040ez For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Tax planning us 1040ez 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. Tax planning us 1040ez The same rule applies to a transfer by your former spouse that is incident to divorce. Tax planning us 1040ez 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. Tax planning us 1040ez If the property transferred to you is a series E, series EE, or series I U. Tax planning us 1040ez S. Tax planning us 1040ez savings bond, the transferor must include in income the interest accrued to the date of transfer. Tax planning us 1040ez 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. Tax planning us 1040ez For more information on these bonds, see chapter 7. Tax planning us 1040ez 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. Tax planning us 1040ez For more information about the transfer of property from a spouse, see chapter 14. Tax planning us 1040ez 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. Tax planning us 1040ez FMV less than donor's adjusted basis. Tax planning us 1040ez   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. Tax planning us 1040ez 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. Tax planning us 1040ez 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. Tax planning us 1040ez See Adjusted Basis , earlier. Tax planning us 1040ez Example. Tax planning us 1040ez You received an acre of land as a gift. Tax planning us 1040ez At the time of the gift, the land had an FMV of $8,000. Tax planning us 1040ez The donor's adjusted basis was $10,000. Tax planning us 1040ez After you received the property, no events occurred to increase or decrease your basis. Tax planning us 1040ez 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. Tax planning us 1040ez 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. Tax planning us 1040ez If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Tax planning us 1040ez Business property. Tax planning us 1040ez   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. Tax planning us 1040ez FMV equal to or greater than donor's adjusted basis. Tax planning us 1040ez   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. Tax planning us 1040ez Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Tax planning us 1040ez   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. Tax planning us 1040ez See Adjusted Basis , earlier. Tax planning us 1040ez   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. Tax planning us 1040ez Figure the increase by multiplying the gift tax paid by a fraction. Tax planning us 1040ez The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Tax planning us 1040ez   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Tax planning us 1040ez 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. Tax planning us 1040ez Example. Tax planning us 1040ez In 2013, you received a gift of property from your mother that had an FMV of $50,000. Tax planning us 1040ez Her adjusted basis was $20,000. Tax planning us 1040ez The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Tax planning us 1040ez She paid a gift tax of $7,320 on the property. Tax planning us 1040ez 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) × . Tax planning us 1040ez 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. Tax planning us 1040ez If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Tax planning us 1040ez However, your basis cannot exceed the FMV of the gift at the time it was given to you. Tax planning us 1040ez 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. Tax planning us 1040ez The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Tax planning us 1040ez 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. Tax planning us 1040ez 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. Tax planning us 1040ez 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. Tax planning us 1040ez For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Tax planning us 1040ez Property inherited from a decedent who died in 2010. Tax planning us 1040ez   If you inherited property from a decedent who died in 2010, special rules may apply. Tax planning us 1040ez For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Tax planning us 1040ez Community property. Tax planning us 1040ez   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. Tax planning us 1040ez 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. Tax planning us 1040ez 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. Tax planning us 1040ez Example. Tax planning us 1040ez You and your spouse owned community property that had a basis of $80,000. Tax planning us 1040ez When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Tax planning us 1040ez The FMV of the community interest was $100,000. Tax planning us 1040ez The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Tax planning us 1040ez The basis of the other half to your spouse's heirs is also $50,000. Tax planning us 1040ez For more information about community property, see Publication 555, Community Property. Tax planning us 1040ez 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. Tax planning us 1040ez To do so, you must figure its basis for depreciation at the time of the change. Tax planning us 1040ez An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Tax planning us 1040ez Basis for depreciation. Tax planning us 1040ez   The basis for depreciation is the lesser of the following amounts. Tax planning us 1040ez The FMV of the property on the date of the change. Tax planning us 1040ez Your adjusted basis on the date of the change. Tax planning us 1040ez Example. Tax planning us 1040ez Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Tax planning us 1040ez 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. Tax planning us 1040ez Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Tax planning us 1040ez Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Tax planning us 1040ez 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. Tax planning us 1040ez 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). Tax planning us 1040ez Sale of property. Tax planning us 1040ez   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. Tax planning us 1040ez Gain. Tax planning us 1040ez   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Tax planning us 1040ez Example. Tax planning us 1040ez 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. Tax planning us 1040ez Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Tax planning us 1040ez Loss. Tax planning us 1040ez   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. Tax planning us 1040ez Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Tax planning us 1040ez Example. Tax planning us 1040ez 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. Tax planning us 1040ez 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. Tax planning us 1040ez Reduce that amount ($180,000) by the depreciation deductions ($37,500). Tax planning us 1040ez The basis for loss is $142,500 ($180,000 − $37,500). Tax planning us 1040ez 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. Tax planning us 1040ez 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. Tax planning us 1040ez You must adjust the basis of stocks for certain events that occur after purchase. Tax planning us 1040ez 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. Tax planning us 1040ez This rule applies only when the additional stock received is identical to the stock held. Tax planning us 1040ez Also reduce your basis when you receive nontaxable distributions. Tax planning us 1040ez They are a return of capital. Tax planning us 1040ez Example. Tax planning us 1040ez In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Tax planning us 1040ez In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Tax planning us 1040ez In 2013 XYZ declared a 2-for-1 stock split. Tax planning us 1040ez You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Tax planning us 1040ez Other basis. Tax planning us 1040ez   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Tax planning us 1040ez For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Tax planning us 1040ez Identifying stocks or bonds sold. Tax planning us 1040ez   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. Tax planning us 1040ez 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. Tax planning us 1040ez For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Tax planning us 1040ez Mutual fund shares. Tax planning us 1040ez   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. Tax planning us 1040ez For more information, see Publication 550. Tax planning us 1040ez Bond premium. Tax planning us 1040ez   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. Tax planning us 1040ez See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Tax planning us 1040ez 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. Tax planning us 1040ez Original issue discount (OID) on debt instruments. Tax planning us 1040ez   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Tax planning us 1040ez See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Tax planning us 1040ez Tax-exempt obligations. Tax planning us 1040ez    OID on tax-exempt obligations is generally not taxable. Tax planning us 1040ez 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. Tax planning us 1040ez The accrued OID is added to the basis of the obligation to determine your gain or loss. Tax planning us 1040ez See chapter 4 of Publication 550. Tax planning us 1040ez Prev  Up  Next   Home   More Online Publications
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The Tax Planning Us 1040ez

Tax planning us 1040ez Index A Absence, temporary, Temporary absence from work. Tax planning us 1040ez , Temporary absence from work. Tax planning us 1040ez Accountable plans, Accountable Plans Address, change of, Reminders Adequate accounting, Adequate accounting. Tax planning us 1040ez Armed Forces, Retirees, survivors, and Armed Forces members. Tax planning us 1040ez , Members of the Armed Forces Distance test, special rule, Armed Forces. Tax planning us 1040ez Form 3903, how to complete, How to complete Form 3903 for members of the Armed Forces. Tax planning us 1040ez Services or reimbursements provided by government, Services or reimbursements provided by government. Tax planning us 1040ez Spouse and dependents, Spouse and dependents. Tax planning us 1040ez Assistance (see Tax help) C Change of address, Reminders Closely related in place, Closely related in place. Tax planning us 1040ez Closely related in time, Closely related in time. Tax planning us 1040ez D Deductible moving expenses, Deductible Moving Expenses, Moving expenses allocable to excluded foreign income. Tax planning us 1040ez Household goods, Household goods and personal effects. Tax planning us 1040ez Moving to and from storage, Moving goods and effects to and from storage. Tax planning us 1040ez Member of your household, Member of your household. Tax planning us 1040ez Moves in U. Tax planning us 1040ez S. Tax planning us 1040ez , Moves to Locations in the United States Moves outside U. Tax planning us 1040ez S. Tax planning us 1040ez , Moves to Locations Outside the United States Moving expenses allocable to excluded foreign income, Moving expenses allocable to excluded foreign income. Tax planning us 1040ez Personal effects, Household goods and personal effects. Tax planning us 1040ez Moving to and from storage, Moving goods and effects to and from storage. Tax planning us 1040ez Reasonable expenses, Reasonable expenses. Tax planning us 1040ez Storage expenses, Storage expenses. Tax planning us 1040ez , Storage expenses. Tax planning us 1040ez Travel by car, Travel by car. Tax planning us 1040ez Travel expenses, Travel expenses. Tax planning us 1040ez Distance test, Distance Test Armed Forces, special rule, Armed Forces. Tax planning us 1040ez First job, First job or return to full-time work. Tax planning us 1040ez Illustration of (Figure A), Main job location, Main job location. Tax planning us 1040ez Return to full-time work, First job or return to full-time work. Tax planning us 1040ez Worksheet 1, Distance Test E Employees Time test for, Time Test for Employees Estimated tax, Tax Withholding and Estimated Tax, Estimated tax. Tax planning us 1040ez Excess reimbursements, Excess reimbursement. Tax planning us 1040ez Excluded foreign income Moving expenses allocable to, Moving expenses allocable to excluded foreign income. Tax planning us 1040ez F Figures (see Tables and figures) First job, First job or return to full-time work. Tax planning us 1040ez Form 1040 Moving expense deduction, Where to deduct. Tax planning us 1040ez Form 3903 Armed Forces members, how to complete, How to complete Form 3903 for members of the Armed Forces. Tax planning us 1040ez Completing form, Completing Form 3903. Tax planning us 1040ez Moving expense deduction calculation, Form 3903 Form W-2 Reimbursements, You meet accountable plan rules. Tax planning us 1040ez , Expenses deducted in earlier year. Tax planning us 1040ez Government provided for Armed Forces members, Services or reimbursements provided by government. Tax planning us 1040ez Form W-4 Withholding allowance, Amount of income tax withheld. Tax planning us 1040ez Free tax services, Free help with your tax return. Tax planning us 1040ez Full-time work, defined, Full-time work. Tax planning us 1040ez H Help (see Tax help) Home, defined, Home defined. Tax planning us 1040ez Household goods, Household goods and personal effects. Tax planning us 1040ez Moving to and from storage, Moving goods and effects to and from storage. Tax planning us 1040ez I Important reminders, Reminders J Joint returns, Joint Return M Main job location Defined, Main job location. Tax planning us 1040ez More than one job, More than one job. Tax planning us 1040ez Union members, Union members. Tax planning us 1040ez Member of household, Member of your household. Tax planning us 1040ez Members of Armed Forces (see Armed Forces) Mileage rate, What's New Missing children, photographs of, Reminders Moves In U. Tax planning us 1040ez S. Tax planning us 1040ez , Moves to Locations in the United States Outside U. Tax planning us 1040ez S. Tax planning us 1040ez , Moves to Locations Outside the United States To and from storage, Moving goods and effects to and from storage. Tax planning us 1040ez Moving expenses, Who Can Deduct Moving Expenses, Deductible Moving Expenses (see also Deductible moving expenses) (see also Who can deduct) N Nonaccountable plans, Nonaccountable Plans Nondeductible expenses, Nondeductible Expenses Reimbursements of, Reimbursement of nondeductible expenses. Tax planning us 1040ez , Reimbursement for deductible and nondeductible expenses. Tax planning us 1040ez P Permanently retired, defined, Retirees who were working abroad. Tax planning us 1040ez Personal effects, Household goods and personal effects. Tax planning us 1040ez Moving to and from storage, Moving goods and effects to and from storage. Tax planning us 1040ez Publications (see Tax help) R Reasonable expenses, Reasonable expenses. Tax planning us 1040ez Reasonable period of time, Reasonable period of time. Tax planning us 1040ez Reimbursements, Reimbursements, Estimated tax. Tax planning us 1040ez Accountable plans, Accountable Plans Adequate accounting, Adequate accounting. Tax planning us 1040ez Armed Forces members, Services or reimbursements provided by government. Tax planning us 1040ez Estimated tax, Estimated tax. Tax planning us 1040ez Excess, Excess reimbursement. Tax planning us 1040ez Excluded from income, Reimbursements excluded from income. Tax planning us 1040ez Included in income, Reimbursements included in income. Tax planning us 1040ez Nonaccountable plans, Nonaccountable Plans Nondeductible expenses, Reimbursement of nondeductible expenses. Tax planning us 1040ez , Reimbursement for deductible and nondeductible expenses. Tax planning us 1040ez Reasonable period of time, Reasonable period of time. Tax planning us 1040ez Reporting moving expenses and reimbursements (Table 2), How and When To Report Types of plans, Types of Reimbursement Plans Reporting expenses, How and When To Report Expenses equal to or less than reimbursement, Expenses equal to or less than reimbursement. Tax planning us 1040ez Expenses greater than reimbursement, Expenses greater than reimbursement. Tax planning us 1040ez Form 3903, deduction calculation, Form 3903 Moving expenses and reimbursements (Table 2), How and When To Report Retirees who move to U. Tax planning us 1040ez S. Tax planning us 1040ez , Retirees, survivors, and Armed Forces members. Tax planning us 1040ez , Retirees or survivors. Tax planning us 1040ez Permanently retired, defined, Retirees who were working abroad. Tax planning us 1040ez Return to full-time work, First job or return to full-time work. Tax planning us 1040ez S Seasonal trade or business, Seasonal trade or business. Tax planning us 1040ez Seasonal work, Seasonal work. Tax planning us 1040ez Self-employed persons Time test, Time Test for Self-Employed Persons, Self-employment. Tax planning us 1040ez Table 1, Time Test for Employees Spouse of Armed Forces member, Spouse and dependents. Tax planning us 1040ez Standard mileage rate, What's New Storage expenses, Storage expenses. Tax planning us 1040ez , Storage expenses. Tax planning us 1040ez Survivors who move to U. Tax planning us 1040ez S. Tax planning us 1040ez , Retirees, survivors, and Armed Forces members. Tax planning us 1040ez , Retirees or survivors. Tax planning us 1040ez , Retirees or Survivors Who Move to the United States, Survivors of decedents who were working abroad. Tax planning us 1040ez When move begins, When a move begins. Tax planning us 1040ez T Tables and figures Distance test, Distance Test Nonmilitary move within U. Tax planning us 1040ez S. Tax planning us 1040ez , can you deduct expenses (Figure B), Seasonal work. Tax planning us 1040ez Reporting moving expenses and reimbursements (Table 2), How and When To Report Time test, satisfying for employees and self-employed persons (Table 1), Time Test for Employees Tax help, How To Get Tax Help Temporary absence, Temporary absence from work. Tax planning us 1040ez , Temporary absence from work. Tax planning us 1040ez Time test, Time Test Employees, Time Test for Employees Exceptions to, Exceptions to the Time Test Full-time work, Full-time work. Tax planning us 1040ez Joint return, Joint Return Not yet met, Time Test Not Yet Met Satisfying for employees and self-employed persons (Table 1), Time Test for Employees Seasonal trade or business, Seasonal trade or business. Tax planning us 1040ez Seasonal work, Seasonal work. Tax planning us 1040ez Self-employed persons, Time Test for Self-Employed Persons, Self-employment. Tax planning us 1040ez Temporary absence from work, Temporary absence from work. Tax planning us 1040ez , Temporary absence from work. Tax planning us 1040ez Travel by car, Travel by car. Tax planning us 1040ez Travel expenses, Travel expenses. Tax planning us 1040ez TTY/TDD information, How To Get Tax Help U Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 Unions Main job location of member, Union members. Tax planning us 1040ez W When to deduct expenses, When To Deduct Expenses, Illustrated Example Choosing when to deduct, Choosing when to deduct. Tax planning us 1040ez Expenses not reimbursed, Expenses not reimbursed. Tax planning us 1040ez Expenses reimbursed, Expenses reimbursed. Tax planning us 1040ez How to make choice, How to make the choice. Tax planning us 1040ez Who can deduct, Who Can Deduct Moving Expenses, When a move begins. Tax planning us 1040ez Armed Forces, members of, Retirees, survivors, and Armed Forces members. Tax planning us 1040ez Distance test, Distance Test Nonmilitary move within U. Tax planning us 1040ez S. Tax planning us 1040ez (Figure B), Seasonal work. Tax planning us 1040ez Related to start of work, Move Related to Start of Work Retirees who move to U. Tax planning us 1040ez S. Tax planning us 1040ez , Retirees, survivors, and Armed Forces members. Tax planning us 1040ez , Retirees or survivors. Tax planning us 1040ez , Retirees or Survivors Who Move to the United States Survivors who move to U. Tax planning us 1040ez S. Tax planning us 1040ez , Retirees, survivors, and Armed Forces members. Tax planning us 1040ez , Retirees or survivors. Tax planning us 1040ez , Retirees or Survivors Who Move to the United States, Survivors of decedents who were working abroad. Tax planning us 1040ez Time test, Time Test Withholding, Tax Withholding and Estimated Tax Worksheet Distance test (Worksheet 1), Distance Test Prev  Up     Home   More Online Publications