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1040x efile Publication 561 - Main Contents Table of Contents What Is Fair Market Value (FMV)?Factors. 1040x efile Stock. 1040x efile Options. 1040x efile Determining Fair Market Value Problems in Determining Fair Market Value Valuation of Various Kinds of PropertyHousehold Goods Used Clothing Jewelry and Gems Paintings, Antiques, and Other Objects of Art Collections Cars, Boats, and Aircraft Inventory Patents Stocks and Bonds Real Estate Interest in a Business Annuities, Interests for Life or Terms of Years, Remainders, and Reversions Certain Life Insurance and Annuity Contracts Partial Interest in Property Not in Trust AppraisalsDeductions of More Than $5,000 Deductions of More Than $500,000 Qualified Appraisal Form 8283 Internal Revenue Service Review of Appraisals Penalty How To Get Tax HelpLow income tax clinics (LITCs). 1040x efile What Is Fair Market Value (FMV)? To figure how much you may deduct for property that you contribute, you must first determine its fair market value on the date of the contribution. 1040x efile Fair market value. 1040x efile   Fair market value (FMV) is the price that property would sell for on the open market. 1040x efile It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. 1040x efile If you put a restriction on the use of property you donate, the FMV must reflect that restriction. 1040x efile Example 1. 1040x efile If you give used clothing to the Salvation Army, the FMV would be the price that typical buyers actually pay for clothing of this age, condition, style, and use. 1040x efile Usually, such items are worth far less than what you paid for them. 1040x efile Example 2. 1040x efile If you donate land and restrict its use to agricultural purposes, you must value the land at its value for agricultural purposes, even though it would have a higher FMV if it were not restricted. 1040x efile Factors. 1040x efile   In making and supporting the valuation of property, all factors affecting value are relevant and must be considered. 1040x efile These include: The cost or selling price of the item, Sales of comparable properties, Replacement cost, and Opinions of experts. 1040x efile   These factors are discussed later. 1040x efile Also, see Table 1 for a summary of questions to ask as you consider each factor. 1040x efile Date of contribution. 1040x efile   Ordinarily, the date of a contribution is the date that the transfer of the property takes place. 1040x efile Stock. 1040x efile   If you deliver, without any conditions, a properly endorsed stock certificate to a qualified organization or to an agent of the organization, the date of the contribution is the date of delivery. 1040x efile If the certificate is mailed and received through the regular mail, it is the date of mailing. 1040x efile If you deliver the certificate to a bank or broker acting as your agent or to the issuing corporation or its agent, for transfer into the name of the organization, the date of the contribution is the date the stock is transferred on the books of the corporation. 1040x efile Options. 1040x efile   If you grant an option to a qualified organization to buy real property, you have not made a charitable contribution until the organization exercises the option. 1040x efile The amount of the contribution is the FMV of the property on the date the option is exercised minus the exercise price. 1040x efile Example. 1040x efile You grant an option to a local university, which is a qualified organization, to buy real property. 1040x efile Under the option, the university could buy the property at any time during a 2-year period for $40,000. 1040x efile The FMV of the property on the date the option is granted is $50,000. 1040x efile In the following tax year, the university exercises the option. 1040x efile The FMV of the property on the date the option is exercised is $55,000. 1040x efile Therefore, you have made a charitable contribution of $15,000 ($55,000, the FMV, minus $40,000, the exercise price) in the tax year the option is exercised. 1040x efile Determining Fair Market Value Determining the value of donated property would be a simple matter if you could rely only on fixed formulas, rules, or methods. 1040x efile Usually it is not that simple. 1040x efile Using such formulas, etc. 1040x efile , seldom results in an acceptable determination of FMV. 1040x efile There is no single formula that always applies when determining the value of property. 1040x efile This is not to say that a valuation is only guesswork. 1040x efile You must consider all the facts and circumstances connected with the property, such as its desirability, use, and scarcity. 1040x efile For example, donated furniture should not be evaluated at some fixed rate such as 15% of the cost of new replacement furniture. 1040x efile When the furniture is contributed, it may be out of style or in poor condition, therefore having little or no market value. 1040x efile On the other hand, it may be an antique, the value of which could not be determined by using any formula. 1040x efile Cost or Selling Price of the Donated Property The cost of the property to you or the actual selling price received by the qualified organization may be the best indication of its FMV. 1040x efile However, because conditions in the market change, the cost or selling price of property may have less weight if the property was not bought or sold reasonably close to the date of contribution. 1040x efile The cost or selling price is a good indication of the property's value if: The purchase or sale took place close to the valuation date in an open market, The purchase or sale was at “arm's-length,” The buyer and seller knew all relevant facts, The buyer and seller did not have to act, and The market did not change between the date of purchase or sale and the valuation date. 1040x efile Example. 1040x efile Tom Morgan, who is not a dealer in gems, bought an assortment of gems for $5,000 from a promoter. 1040x efile The promoter claimed that the price was “wholesale” even though he and other dealers made similar sales at similar prices to other persons who were not dealers. 1040x efile The promoter said that if Tom kept the gems for more than 1 year and then gave them to charity, Tom could claim a charitable deduction of $15,000, which, according to the promoter, would be the value of the gems at the time of contribution. 1040x efile Tom gave the gems to a qualified charity 13 months after buying them. 1040x efile The selling price for these gems had not changed from the date of purchase to the date he donated them to charity. 1040x efile The best evidence of FMV depends on actual transactions and not on some artificial estimate. 1040x efile The $5,000 charged Tom and others is, therefore, the best evidence of the maximum FMV of the gems. 1040x efile Terms of the purchase or sale. 1040x efile   The terms of the purchase or sale should be considered in determining FMV if they influenced the price. 1040x efile These terms include any restrictions, understandings, or covenants limiting the use or disposition of the property. 1040x efile Rate of increase or decrease in value. 1040x efile   Unless you can show that there were unusual circumstances, it is assumed that the increase or decrease in the value of your donated property from your cost has been at a reasonable rate. 1040x efile For time adjustments, an appraiser may consider published price indexes for information on general price trends, building costs, commodity costs, securities, and works of art sold at auction in arm's-length sales. 1040x efile Example. 1040x efile Bill Brown bought a painting for $10,000. 1040x efile Thirteen months later he gave it to an art museum, claiming a charitable deduction of $15,000 on his tax return. 1040x efile The appraisal of the painting should include information showing that there were unusual circumstances that justify a 50% increase in value for the 13 months Bill held the property. 1040x efile Arm's-length offer. 1040x efile   An arm's-length offer to buy the property close to the valuation date may help to prove its value if the person making the offer was willing and able to complete the transaction. 1040x efile To rely on an offer, you should be able to show proof of the offer and the specific amount to be paid. 1040x efile Offers to buy property other than the donated item will help to determine value if the other property is reasonably similar to the donated property. 1040x efile Sales of Comparable Properties The sales prices of properties similar to the donated property are often important in determining the FMV. 1040x efile The weight to be given to each sale depends on the following. 1040x efile The degree of similarity between the property sold and the donated property. 1040x efile The time of the sale—whether it was close to the valuation date. 1040x efile The circumstances of the sale—whether it was at arm's-length with a knowledgeable buyer and seller, with neither having to act. 1040x efile The conditions of the market in which the sale was made—whether unusually inflated or deflated. 1040x efile The comparable sales method of valuing real estate is explained later under Valuation of Various Kinds of Property. 1040x efile Example 1. 1040x efile Mary Black, who is not a book dealer, paid a promoter $10,000 for 500 copies of a single edition of a modern translation of the Bible. 1040x efile The promoter had claimed that the price was considerably less than the “retail” price, and gave her a statement that the books had a total retail value of $30,000. 1040x efile The promoter advised her that if she kept the Bibles for more than 1 year and then gave them to a qualified organization, she could claim a charitable deduction for the “retail” price of $30,000. 1040x efile Thirteen months later she gave all the Bibles to a church that she selected from a list provided by the promoter. 1040x efile At the time of her donation, wholesale dealers were selling similar quantities of Bibles to the general public for $10,000. 1040x efile The FMV of the Bibles is $10,000, the price at which similar quantities of Bibles were being sold to others at the time of the contribution. 1040x efile Example 2. 1040x efile The facts are the same as in Example 1, except that the promoter gave Mary Black a second option. 1040x efile The promoter said that if Mary wanted a charitable deduction within 1 year of the purchase, she could buy the 500 Bibles at the “retail” price of $30,000, paying only $10,000 in cash and giving a promissory note for the remaining $20,000. 1040x efile The principal and interest on the note would not be due for 12 years. 1040x efile According to the promoter, Mary could then, within 1 year of the purchase, give the Bibles to a qualified organization and claim the full $30,000 retail price as a charitable contribution. 1040x efile She purchased the Bibles under the second option and, 3 months later, gave them to a church, which will use the books for church purposes. 1040x efile At the time of the gift, the promoter was selling similar lots of Bibles for either $10,000 or $30,000. 1040x efile The difference between the two prices was solely at the discretion of the buyer. 1040x efile The promoter was a willing seller for $10,000. 1040x efile Therefore, the value of Mary's contribution of the Bibles is $10,000, the amount at which similar lots of Bibles could be purchased from the promoter by members of the general public. 1040x efile Replacement Cost The cost of buying, building, or manufacturing property similar to the donated item should be considered in determining FMV. 1040x efile However, there must be a reasonable relationship between the replacement cost and the FMV. 1040x efile The replacement cost is the amount it would cost to replace the donated item on the valuation date. 1040x efile Often there is no relationship between the replacement cost and the FMV. 1040x efile If the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important. 1040x efile To determine the replacement cost of the donated property, find the “estimated replacement cost new. 1040x efile ” Then subtract from this figure an amount for depreciation due to the physical condition and obsolescence of the donated property. 1040x efile You should be able to show the relationship between the depreciated replacement cost and the FMV, as well as how you arrived at the “estimated replacement cost new. 1040x efile ” Opinions of Experts Generally, the weight given to an expert's opinion on matters such as the authenticity of a coin or a work of art, or the most profitable and best use of a piece of real estate, depends on the knowledge and competence of the expert and the thoroughness with which the opinion is supported by experience and facts. 1040x efile For an expert's opinion to deserve much weight, the facts must support the opinion. 1040x efile For additional information, see Appraisals, later. 1040x efile Table 1. 1040x efile Factors That Affect FMV IF the factor you are considering is. 1040x efile . 1040x efile . 1040x efile THEN you should ask these questions. 1040x efile . 1040x efile . 1040x efile     cost or selling price Was the purchase or sale of the property reasonably close to the date of contribution? Was any increase or decrease in value, as compared to your cost, at a reasonable rate? Do the terms of purchase or sale limit what can be done with the property? Was there an arm's-length offer to buy the property close to the valuation date?     sales of comparable properties How similar is the property sold to the property donated? How close is the date of sale to the valuation date? Was the sale at arm's-length? What was the condition of the market at the time of sale?     replacement cost What would it cost to replace the donated property? Is there a reasonable relationship between replacement cost and FMV? Is the supply of the donated property more or less than the demand for it?     opinions of experts Is the expert knowledgeable and competent? Is the opinion thorough and supported by facts and experience? Problems in Determining Fair Market Value There are a number of problems in determining the FMV of donated property. 1040x efile Unusual Market Conditions The sale price of the property itself in an arm's-length transaction in an open market is often the best evidence of its value. 1040x efile When you rely on sales of comparable property, the sales must have been made in an open market. 1040x efile If those sales were made in a market that was artificially supported or stimulated so as not to be truly representative, the prices at which the sales were made will not indicate the FMV. 1040x efile For example, liquidation sale prices usually do not indicate the FMV. 1040x efile Also, sales of stock under unusual circumstances, such as sales of small lots, forced sales, and sales in a restricted market, may not represent the FMV. 1040x efile Selection of Comparable Sales Using sales of comparable property is an important method for determining the FMV of donated property. 1040x efile However, the amount of weight given to a sale depends on the degree of similarity between the comparable and the donated properties. 1040x efile The degree of similarity must be close enough so that this selling price would have been given consideration by reasonably well-informed buyers or sellers of the property. 1040x efile Example. 1040x efile You give a rare, old book to your former college. 1040x efile The book is a third edition and is in poor condition because of a missing back cover. 1040x efile You discover that there was a sale for $300, near the valuation date, of a first edition of the book that was in good condition. 1040x efile Although the contents are the same, the books are not at all similar because of the different editions and their physical condition. 1040x efile Little consideration would be given to the selling price of the $300 property by knowledgeable buyers or sellers. 1040x efile Future Events You may not consider unexpected events happening after your donation of property in making the valuation. 1040x efile You may consider only the facts known at the time of the gift, and those that could be reasonably expected at the time of the gift. 1040x efile Example. 1040x efile You give farmland to a qualified charity. 1040x efile The transfer provides that your mother will have the right to all income and full use of the property for her life. 1040x efile Even though your mother dies 1 week after the transfer, the value of the property on the date it is given is its present value, subject to the life interest as estimated from actuarial tables. 1040x efile You may not take a higher deduction because the charity received full use and possession of the land only 1 week after the transfer. 1040x efile Using Past Events to Predict the Future A common error is to rely too much on past events that do not fairly reflect the probable future earnings and FMV. 1040x efile Example. 1040x efile You give all your rights in a successful patent to your favorite charity. 1040x efile Your records show that before the valuation date there were three stages in the patent's history of earnings. 1040x efile First, there was rapid growth in earnings when the invention was introduced. 1040x efile Then, there was a period of high earnings when the invention was being exploited. 1040x efile Finally, there was a decline in earnings when competing inventions were introduced. 1040x efile The entire history of earnings may be relevant in estimating the future earnings. 1040x efile However, the appraiser must not rely too much on the stage of rapid growth in earnings, or of high earnings. 1040x efile The market conditions at those times do not represent the condition of the market at the valuation date. 1040x efile What is most significant is the trend of decline in earnings up to the valuation date. 1040x efile For more information about donations of patents, see Patents, later. 1040x efile Valuation of Various Kinds of Property This section contains information on determining the FMV of ordinary kinds of donated property. 1040x efile For information on appraisals, see Appraisals, later. 1040x efile Household Goods The FMV of used household goods, such as furniture, appliances, and linens, is usually much lower than the price paid when new. 1040x efile Such used property may have little or no market value because of its worn condition. 1040x efile It may be out of style or no longer useful. 1040x efile You cannot take a deduction for household goods donated after August 17, 2006, unless they are in good used condition or better. 1040x efile A household good that is not in good used condition or better for which you take a deduction of more than $500 requires a qualified appraisal. 1040x efile See Deduction over $500 for certain clothing or household items, later. 1040x efile If the property is valuable because it is old or unique, see the discussion under Paintings, Antiques, and Other Objects of Art. 1040x efile Used Clothing Used clothing and other personal items are usually worth far less than the price you paid for them. 1040x efile Valuation of items of clothing does not lend itself to fixed formulas or methods. 1040x efile The price that buyers of used items actually pay in used clothing stores, such as consignment or thrift shops, is an indication of the value. 1040x efile You cannot take a deduction for clothing donated after August 17, 2006, unless it is in good used condition or better. 1040x efile An item of clothing that is not in good used condition or better for which you take a deduction of more than $500 requires a qualified appraisal. 1040x efile See Deduction over $500 for certain clothing or household items, later. 1040x efile For valuable furs or very expensive gowns, a Form 8283 may have to be sent with your tax return. 1040x efile Jewelry and Gems Jewelry and gems are of such a specialized nature that it is almost always necessary to get an appraisal by a specialized jewelry appraiser. 1040x efile The appraisal should describe, among other things, the style of the jewelry, the cut and setting of the gem, and whether it is now in fashion. 1040x efile If not in fashion, the possibility of having the property redesigned, recut, or reset should be reported in the appraisal. 1040x efile The stone's coloring, weight, cut, brilliance, and flaws should be reported and analyzed. 1040x efile Sentimental personal value has no effect on FMV. 1040x efile But if the jewelry was owned by a famous person, its value might increase. 1040x efile Paintings, Antiques, and Other Objects of Art Your deduction for contributions of paintings, antiques, and other objects of art, should be supported by a written appraisal from a qualified and reputable source, unless the deduction is $5,000 or less. 1040x efile Examples of information that should be included in appraisals of art objects—paintings in particular—are found later under Qualified Appraisal. 1040x efile Art valued at $20,000 or more. 1040x efile   If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the signed appraisal to your return. 1040x efile For individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8 x 10 inch color photograph or a color transparency no smaller than 4 x 5 inches, must be provided upon request. 1040x efile Art valued at $50,000 or more. 1040x efile   If you donate an item of art that has been appraised at $50,000 or more, you can request a Statement of Value for that item from the IRS. 1040x efile You must request the statement before filing the tax return that reports the donation. 1040x efile Your request must include the following. 1040x efile A copy of a qualified appraisal of the item. 1040x efile See Qualified Appraisal, later. 1040x efile A $2,500 check or money order payable to the Internal Revenue Service for the user fee that applies to your request regarding one, two, or three items of art. 1040x efile Add $250 for each item in excess of three. 1040x efile A completed Form 8283, Section B. 1040x efile The location of the IRS territory that has examination responsibility for your return. 1040x efile If your request lacks essential information, you will be notified and given 30 days to provide the missing information. 1040x efile   Send your request to: Internal Revenue Service Attention: Art Appraisal (C:AP:ART) P. 1040x efile O. 1040x efile Box 27720 McPherson Station Washington, DC 20038 Refunds. 1040x efile   You can withdraw your request for a Statement of Value at any time before it is issued. 1040x efile However, the IRS will not refund the user fee if you do. 1040x efile   If the IRS declines to issue a Statement of Value in the interest of efficient tax administration, the IRS will refund the user fee. 1040x efile Authenticity. 1040x efile   The authenticity of the donated art must be determined by the appraiser. 1040x efile Physical condition. 1040x efile   Important items in the valuation of antiques and art are physical condition and extent of restoration. 1040x efile These have a significant effect on the value and must be fully reported in an appraisal. 1040x efile An antique in damaged condition, or lacking the “original brasses,” may be worth much less than a similar piece in excellent condition. 1040x efile Art appraisers. 1040x efile   More weight will usually be given to an appraisal prepared by an individual specializing in the kind and price range of the art being appraised. 1040x efile Certain art dealers or appraisers specialize, for example, in old masters, modern art, bronze sculpture, etc. 1040x efile Their opinions on the authenticity and desirability of such art would usually be given more weight than the opinions of more generalized art dealers or appraisers. 1040x efile They can report more recent comparable sales to support their opinion. 1040x efile   To identify and locate experts on unique, specialized items or collections, you may wish to use the current Official Museum Directory of the American Association of Museums. 1040x efile It lists museums both by state and by category. 1040x efile   To help you locate a qualified appraiser for your donation, you may wish to ask an art historian at a nearby college or the director or curator of a local museum. 1040x efile The Yellow Pages often list specialized art and antique dealers, auctioneers, and art appraisers. 1040x efile You may be able to find a qualified appraiser on the Internet. 1040x efile You may also contact associations of dealers for guidance. 1040x efile Collections Since many kinds of hobby collections may be the subject of a charitable donation, it is not possible to discuss all of the possible collectibles in this publication. 1040x efile Most common are rare books, autographs, sports memorabilia, dolls, manuscripts, stamps, coins, guns, phonograph records, and natural history items. 1040x efile Many of the elements of valuation that apply to paintings and other objects of art, discussed earlier, also apply to miscellaneous collections. 1040x efile Reference material. 1040x efile   Publications available to help you determine the value of many kinds of collections include catalogs, dealers' price lists, and specialized hobby periodicals. 1040x efile When using one of these price guides, you must use the current edition at the date of contribution. 1040x efile However, these sources are not always reliable indicators of FMV and should be supported by other evidence. 1040x efile   For example, a dealer may sell an item for much less than is shown on a price list, particularly after the item has remained unsold for a long time. 1040x efile The price an item sold for in an auction may have been the result of a rigged sale or a mere bidding duel. 1040x efile The appraiser must analyze the reference material, and recognize and make adjustments for misleading entries. 1040x efile If you are donating a valuable collection, you should get an appraisal. 1040x efile If your donation appears to be of little value, you may be able to make a satisfactory valuation using reference materials available at a state, city, college, or museum library. 1040x efile Stamp collections. 1040x efile   Most libraries have catalogs or other books that report the publisher's estimate of values. 1040x efile Generally, two price levels are shown for each stamp: the price postmarked and the price not postmarked. 1040x efile Stamp dealers generally know the value of their merchandise and are able to prepare satisfactory appraisals of valuable collections. 1040x efile Coin collections. 1040x efile   Many catalogs and other reference materials show the writer's or publisher's opinion of the value of coins on or near the date of the publication. 1040x efile Like many other collectors' items, the value of a coin depends on the demand for it, its age, and its rarity. 1040x efile Another important factor is the coin's condition. 1040x efile For example, there is a great difference in the value of a coin that is in mint condition and a similar coin that is only in good condition. 1040x efile   Catalogs usually establish a category for coins, based on their physical condition—mint or uncirculated, extremely fine, very fine, fine, very good, good, fair, or poor—with a different valuation for each category. 1040x efile Books. 1040x efile   The value of books is usually determined by selecting comparable sales and adjusting the prices according to the differences between the comparable sales and the item being evaluated. 1040x efile This is difficult to do and, except for a collection of little value, should be done by a specialized appraiser. 1040x efile Within the general category of literary property, there are dealers who specialize in certain areas, such as Americana, foreign imports, Bibles, and scientific books. 1040x efile Modest value of collection. 1040x efile   If the collection you are donating is of modest value, not requiring a written appraisal, the following information may help you in determining the FMV. 1040x efile   A book that is very old, or very rare, is not necessarily valuable. 1040x efile There are many books that are very old or rare, but that have little or no market value. 1040x efile Condition of book. 1040x efile   The condition of a book may have a great influence on its value. 1040x efile Collectors are interested in items that are in fine, or at least good, condition. 1040x efile When a book has a missing page, a loose binding, tears, stains, or is otherwise in poor condition, its value is greatly lowered. 1040x efile Other factors. 1040x efile   Some other factors in the valuation of a book are the kind of binding (leather, cloth, paper), page edges, and illustrations (drawings and photographs). 1040x efile Collectors usually want first editions of books. 1040x efile However, because of changes or additions, other editions are sometimes worth as much as, or more than, the first edition. 1040x efile Manuscripts, autographs, diaries, and similar items. 1040x efile   When these items are handwritten, or at least signed by famous people, they are often in demand and are valuable. 1040x efile The writings of unknowns also may be of value if they are of unusual historical or literary importance. 1040x efile Determining the value of such material is difficult. 1040x efile For example, there may be a great difference in value between two diaries that were kept by a famous person—one kept during childhood and the other during a later period in his or her life. 1040x efile The appraiser determines a value in these cases by applying knowledge and judgment to such factors as comparable sales and conditions. 1040x efile Signatures. 1040x efile   Signatures, or sets of signatures, that were cut from letters or other papers usually have little or no value. 1040x efile But complete sets of the signatures of U. 1040x efile S. 1040x efile presidents are in demand. 1040x efile Cars, Boats, and Aircraft If you donate a car, a boat, or an aircraft to a charitable organization, its FMV must be determined. 1040x efile Certain commercial firms and trade organizations publish monthly or seasonal guides for different regions of the country, containing complete dealer sale prices or dealer average prices for recent model years. 1040x efile Prices are reported for each make, model, and year. 1040x efile These guides also provide estimates for adjusting for unusual equipment, unusual mileage, and physical condition. 1040x efile The prices are not “official,” and these publications are not considered an appraisal of any specific donated property. 1040x efile But they do provide clues for making an appraisal and suggest relative prices for comparison with current sales and offerings in your area. 1040x efile These publications are sometimes available from public libraries or at a bank, credit union, or finance company. 1040x efile You can also find pricing information about used cars on the Internet. 1040x efile An acceptable measure of the FMV of a donated car, boat, or airplane is an amount not in excess of the price listed in a used vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. 1040x efile However, the FMV may be less than that amount if the vehicle has engine trouble, body damage, high mileage, or any type of excessive wear. 1040x efile The FMV of a donated vehicle is the same as the price listed in a used vehicle pricing guide for a private party sale only if the guide lists a sales price for a vehicle that is the same make, model, and year, sold in the same area, in the same condition, with the same or similar options or accessories, and with the same or similar warranties as the donated vehicle. 1040x efile Example. 1040x efile You donate a used car in poor condition to a local high school for use by students studying car repair. 1040x efile A used car guide shows the dealer retail value for this type of car in poor condition is $1,600. 1040x efile However, the guide shows the price for a private party sale of the car is only $750. 1040x efile The FMV of the car is considered to be no more than $750. 1040x efile Boats. 1040x efile   Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor because the physical condition is so critical to the value. 1040x efile More information. 1040x efile   Your deduction for a donated car, boat, or airplane generally is limited to the gross proceeds from its sale by the qualified organization. 1040x efile This rule applies if the claimed value of the donated vehicle is more than $500. 1040x efile In certain cases, you can deduct the vehicle's FMV. 1040x efile For details, see Publication 526. 1040x efile Inventory If you donate any inventory item to a charitable organization, the amount of your deductible contribution generally is the FMV of the item, minus any gain you would have realized if you had sold the item at its FMV on the date of the gift. 1040x efile For more information, see Publication 526. 1040x efile Patents To determine the FMV of a patent, you must take into account, among other factors: Whether the patented technology has been made obsolete by other technology; Any restrictions on the donee's use of, or ability to transfer, the patented technology; and The length of time remaining before the patent expires. 1040x efile However, your deduction for a donation of a patent or other intellectual property is its FMV, minus any gain you would have realized if you had sold the property at its FMV on the date of the gift. 1040x efile Generally, this means your deduction is the lesser of the property's FMV or its basis. 1040x efile For details, see Publication 526. 1040x efile Stocks and Bonds The value of stocks and bonds is the FMV of a share or bond on the valuation date. 1040x efile See Date of contribution, earlier, under What Is Fair Market Value (FMV). 1040x efile Selling prices on valuation date. 1040x efile   If there is an active market for the contributed stocks or bonds on a stock exchange, in an over-the-counter market, or elsewhere, the FMV of each share or bond is the average price between the highest and lowest quoted selling prices on the valuation date. 1040x efile For example, if the highest selling price for a share was $11, and the lowest $9, the average price is $10. 1040x efile You get the average price by adding $11 and $9 and dividing the sum by 2. 1040x efile No sales on valuation date. 1040x efile   If there were no sales on the valuation date, but there were sales within a reasonable period before and after the valuation date, you determine FMV by taking the average price between the highest and lowest sales prices on the nearest date before and on the nearest date after the valuation date. 1040x efile Then you weight these averages in inverse order by the respective number of trading days between the selling dates and the valuation date. 1040x efile Example. 1040x efile   On the day you gave stock to a qualified organization, there were no sales of the stock. 1040x efile Sales of the stock nearest the valuation date took place two trading days before the valuation date at an average selling price of $10 and three trading days after the valuation date at an average selling price of $15. 1040x efile The FMV on the valuation date was $12, figured as follows: [(3 x $10) + (2 x $15)] ÷ 5 = $12 Listings on more than one stock exchange. 1040x efile   Stocks or bonds listed on more than one stock exchange are valued based on the prices of the exchange on which they are principally dealt. 1040x efile This applies if these prices are published in a generally available listing or publication of general circulation. 1040x efile If this is not applicable, and the stocks or bonds are reported on a composite listing of combined exchanges in a publication of general circulation, use the composite list. 1040x efile See also Unavailable prices or closely held corporation, later. 1040x efile Bid and asked prices on valuation date. 1040x efile   If there were no sales within a reasonable period before and after the valuation date, the FMV is the average price between the bona fide bid and asked prices on the valuation date. 1040x efile Example. 1040x efile Although there were no sales of Blue Corporation stock on the valuation date, bona fide bid and asked prices were available on that date of $14 and $16, respectively. 1040x efile The FMV is $15, the average price between the bid and asked prices. 1040x efile No prices on valuation date. 1040x efile   If there were no prices available on the valuation date, you determine FMV by taking the average prices between the bona fide bid and asked prices on the closest trading date before and after the valuation date. 1040x efile Both dates must be within a reasonable period. 1040x efile Then you weight these averages in inverse order by the respective number of trading days between the bid and asked dates and the valuation date. 1040x efile Example. 1040x efile On the day you gave stock to a qualified organization, no prices were available. 1040x efile Bona fide bid and asked prices 3 days before the valuation date were $10 and 2 days after the valuation date were $15. 1040x efile The FMV on the valuation date is $13, figured as follows: [(2 x $10) + (3 x $15)] ÷ 5 = $13 Prices only before or after valuation date, but not both. 1040x efile   If no selling prices or bona fide bid and asked prices are available on a date within a reasonable period before the valuation date, but are available on a date within a reasonable period after the valuation date, or vice versa, then the average price between the highest and lowest of such available prices may be treated as the value. 1040x efile Large blocks of stock. 1040x efile   When a large block of stock is put on the market, it may lower the selling price of the stock if the supply is greater than the demand. 1040x efile On the other hand, market forces may exist that will afford higher prices for large blocks of stock. 1040x efile Because of the many factors to be considered, determining the value of large blocks of stock usually requires the help of experts specializing in underwriting large quantities of securities, or in trading in the securities of the industry of which the particular company is a part. 1040x efile Unavailable prices or closely held corporation. 1040x efile   If selling prices or bid and asked prices are not available, or if securities of a closely held corporation are involved, determine the FMV by considering the following factors. 1040x efile For bonds, the soundness of the security, the interest yield, the date of maturity, and other relevant factors. 1040x efile For shares of stock, the company's net worth, prospective earning power and dividend-paying capacity, and other relevant factors. 1040x efile Other factors. 1040x efile   Other relevant factors include: The nature and history of the business, especially its recent history, The goodwill of the business, The economic outlook in the particular industry, The company's position in the industry, its competitors, and its management, and The value of securities of corporations engaged in the same or similar business. 1040x efile For preferred stock, the most important factors are its yield, dividend coverage, and protection of its liquidation preference. 1040x efile   You should keep complete financial and other information on which the valuation is based. 1040x efile This includes copies of reports of examinations of the company made by accountants, engineers, or any technical experts on or close to the valuation date. 1040x efile Restricted securities. 1040x efile   Some classes of stock cannot be traded publicly because of restrictions imposed by the Securities and Exchange Commission, or by the corporate charter or a trust agreement. 1040x efile These restricted securities usually trade at a discount in relation to freely traded securities. 1040x efile   To arrive at the FMV of restricted securities, factors that you must consider include the resale provisions found in the restriction agreements, the relative negotiating strengths of the buyer and seller, and the market experience of freely traded securities of the same class as the restricted securities. 1040x efile Real Estate Because each piece of real estate is unique and its valuation is complicated, a detailed appraisal by a professional appraiser is necessary. 1040x efile The appraiser must be thoroughly trained in the application of appraisal principles and theory. 1040x efile In some instances the opinions of equally qualified appraisers may carry unequal weight, such as when one appraiser has a better knowledge of local conditions. 1040x efile The appraisal report must contain a complete description of the property, such as street address, legal description, and lot and block number, as well as physical features, condition, and dimensions. 1040x efile The use to which the property is put, zoning and permitted uses, and its potential use for other higher and better uses are also relevant. 1040x efile In general, there are three main approaches to the valuation of real estate. 1040x efile An appraisal may require the combined use of two or three methods rather than one method only. 1040x efile 1. 1040x efile Comparable Sales The comparable sales method compares the donated property with several similar properties that have been sold. 1040x efile The selling prices, after adjustments for differences in date of sale, size, condition, and location, would then indicate the estimated FMV of the donated property. 1040x efile If the comparable sales method is used to determine the value of unimproved real property (land without significant buildings, structures, or any other improvements that add to its value), the appraiser should consider the following factors when comparing the potential comparable property and the donated property: Location, size, and zoning or use restrictions, Accessibility and road frontage, and available utilities and water rights, Riparian rights (right of access to and use of the water by owners of land on the bank of a river) and existing easements, rights-of-way, leases, etc. 1040x efile , Soil characteristics, vegetative cover, and status of mineral rights, and Other factors affecting value. 1040x efile For each comparable sale, the appraisal must include the names of the buyer and seller, the deed book and page number, the date of sale and selling price, a property description, the amount and terms of mortgages, property surveys, the assessed value, the tax rate, and the assessor's appraised FMV. 1040x efile The comparable selling prices must be adjusted to account for differences between the sale property and the donated property. 1040x efile Because differences of opinion may arise between appraisers as to the degree of comparability and the amount of the adjustment considered necessary for comparison purposes, an appraiser should document each item of adjustment. 1040x efile Only comparable sales having the least adjustments in terms of items and/or total dollar adjustments should be considered as comparable to the donated property. 1040x efile 2. 1040x efile Capitalization of Income This method capitalizes the net income from the property at a rate that represents a fair return on the particular investment at the particular time, considering the risks involved. 1040x efile The key elements are the determination of the income to be capitalized and the rate of capitalization. 1040x efile 3. 1040x efile Replacement Cost New or Reproduction Cost Minus Observed Depreciation This method, used alone, usually does not result in a determination of FMV. 1040x efile Instead, it generally tends to set the upper limit of value, particularly in periods of rising costs, because it is reasonable to assume that an informed buyer will not pay more for the real estate than it would cost to reproduce a similar property. 1040x efile Of course, this reasoning does not apply if a similar property cannot be created because of location, unusual construction, or some other reason. 1040x efile Generally, this method serves to support the value determined from other methods. 1040x efile When the replacement cost method is applied to improved realty, the land and improvements are valued separately. 1040x efile The replacement cost of a building is figured by considering the materials, the quality of workmanship, and the number of square feet or cubic feet in the building. 1040x efile This cost represents the total cost of labor and material, overhead, and profit. 1040x efile After the replacement cost has been figured, consideration must be given to the following factors: Physical deterioration—the wear and tear on the building itself, Functional obsolescence—usually in older buildings with, for example, inadequate lighting, plumbing, or heating, small rooms, or a poor floor plan, and Economic obsolescence—outside forces causing the whole area to become less desirable. 1040x efile Interest in a Business The FMV of any interest in a business, whether a sole proprietorship or a partnership, is the amount that a willing buyer would pay for the interest to a willing seller after consideration of all relevant factors. 1040x efile The relevant factors to be considered in valuing the business are: The FMV of the assets of the business, The demonstrated earnings capacity of the business, based on a review of past and current earnings, and The other factors used in evaluating corporate stock, if they apply. 1040x efile The value of the goodwill of the business should also be taken into consideration. 1040x efile You should keep complete financial and other information on which you base the valuation. 1040x efile This includes copies of reports of examinations of the business made by accountants, engineers, or any technical experts on or close to the valuation date. 1040x efile Annuities, Interests for Life or Terms of Years, Remainders, and Reversions The value of these kinds of property is their present value, except in the case of annuities under contracts issued by companies regularly engaged in their sale. 1040x efile The valuation of these commercial annuity contracts and of insurance policies is discussed later under Certain Life Insurance and Annuity Contracts. 1040x efile To determine present value, you must know the applicable interest rate and use actuarial tables. 1040x efile Interest rate. 1040x efile   The applicable interest rate varies. 1040x efile It is announced monthly in a news release and published in the Internal Revenue Bulletin as a Revenue Ruling. 1040x efile The interest rate to use is under the heading “Rate Under Section 7520” for a given month and year. 1040x efile You can call the IRS office at 1-800-829-1040 to obtain this rate. 1040x efile Actuarial tables. 1040x efile   You need to refer to actuarial tables to determine a qualified interest in the form of an annuity, any interest for life or a term of years, or any remainder interest to a charitable organization. 1040x efile   Use the valuation tables set forth in IRS Publications 1457, Actuarial Values (Book Aleph), and 1458, Actuarial Values (Book Beth). 1040x efile Both of these publications provide tables containing actuarial factors to be used in determining the present value of an annuity, an interest for life or for a term of years, or a remainder or reversionary interest. 1040x efile For qualified charitable transfers, you can use the factor for the month in which you made the contribution or for either of the 2 months preceding that month. 1040x efile   Publication 1457 also contains actuarial factors for computing the value of a remainder interest in a charitable remainder annuity trust and a pooled income fund. 1040x efile Publication 1458 contains the factors for valuing the remainder interest in a charitable remainder unitrust. 1040x efile You can download Publications 1457 and 1458 from www. 1040x efile irs. 1040x efile gov. 1040x efile In addition, they are available for purchase via the website of the U. 1040x efile S. 1040x efile Government Printing Office, by phone at (202) 512-1800, or by mail from the: Superintendent of Documents P. 1040x efile O. 1040x efile Box 371954 Pittsburgh, PA 15250-7954 Tables containing actuarial factors for transfers to pooled income funds may also be found in Income Tax Regulation 1. 1040x efile 642(c)-6(e)(6), transfers to charitable remainder unitrusts in Regulation 1. 1040x efile 664-4(e), and other transfers in Regulation 20. 1040x efile 2031-7(d)(6). 1040x efile Special factors. 1040x efile   If you need a special factor for an actual transaction, you can request a letter ruling. 1040x efile Be sure to include the date of birth of each person the duration of whose life may affect the value of the interest. 1040x efile Also include copies of the relevant instruments. 1040x efile IRS charges a user fee for providing special factors. 1040x efile   For more information about requesting a ruling, see Revenue Procedure 2006-1 (or annual update), 2006-1 I. 1040x efile R. 1040x efile B. 1040x efile 1. 1040x efile Revenue Procedure 2006-1 is available at www. 1040x efile irs. 1040x efile gov/irb/2006-01_IRB/ar06. 1040x efile html. 1040x efile   For information on the circumstances under which a charitable deduction may be allowed for the donation of a partial interest in property not in trust, see Partial Interest in Property Not in Trust, later. 1040x efile Certain Life Insurance and Annuity Contracts The value of an annuity contract or a life insurance policy issued by a company regularly engaged in the sale of such contracts or policies is the amount that company would charge for a comparable contract. 1040x efile But if the donee of a life insurance policy may reasonably be expected to cash the policy rather than hold it as an investment, then the FMV is the cash surrender value rather than the replacement cost. 1040x efile If an annuity is payable under a combination annuity contract and life insurance policy (for example, a retirement income policy with a death benefit) and there was no insurance element when it was transferred to the charity, the policy is treated as an annuity contract. 1040x efile Partial Interest in Property Not in Trust Generally, no deduction is allowed for a charitable contribution, not made in trust, of less than your entire interest in property. 1040x efile However, this does not apply to a transfer of less than your entire interest if it is a transfer of: A remainder interest in your personal residence or farm, An undivided part of your entire interest in property, or A qualified conservation contribution. 1040x efile Remainder Interest in Real Property The amount of the deduction for a donation of a remainder interest in real property is the FMV of the remainder interest at the time of the contribution. 1040x efile To determine this value, you must know the FMV of the property on the date of the contribution. 1040x efile Multiply this value by the appropriate factor. 1040x efile Publications 1457 and 1458 contain these factors. 1040x efile You must make an adjustment for depreciation or depletion using the factors shown in Publication 1459, Actuarial Values (Book Gimel). 1040x efile You can use the factors for the month in which you made the contribution or for either of the two months preceding that month. 1040x efile See the earlier discussion on Annuities, Interests for Life or Terms of Years, Remainders, and Reversions. 1040x efile You can download Publication 1459 from www. 1040x efile irs. 1040x efile gov. 1040x efile For this purpose, the term “depreciable property” means any property subject to wear and tear or obsolescence, even if not used in a trade or business or for the production of income. 1040x efile If the remainder interest includes both depreciable and nondepreciable property, for example a house and land, the FMV must be allocated between each kind of property at the time of the contribution. 1040x efile This rule also applies to a gift of a remainder interest that includes property that is part depletable and part not depletable. 1040x efile Take into account depreciation or depletion only for the property that is subject to depreciation or depletion. 1040x efile For more information, see section 1. 1040x efile 170A-12 of the Income Tax Regulations. 1040x efile Undivided Part of Your Entire Interest A contribution of an undivided part of your entire interest in property must consist of a part of each and every substantial interest or right you own in the property. 1040x efile It must extend over the entire term of your interest in the property. 1040x efile For example, you are entitled to the income from certain property for your life (life estate) and you contribute 20% of that life estate to a qualified organization. 1040x efile You can claim a deduction for the contribution if you do not have any other interest in the property. 1040x efile To figure the value of a contribution involving a partial interest, see Publication 1457. 1040x efile If the only interest you own in real property is a remainder interest and you transfer part of that interest to a qualified organization, see the previous discussion on valuation of a remainder interest in real property. 1040x efile Qualified Conservation Contribution A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization to be used only for conservation purposes. 1040x efile Qualified organization. 1040x efile   For purposes of a qualified conservation contribution, a qualified organization is: A governmental unit, A publicly supported charitable, religious, scientific, literary, educational, etc. 1040x efile , organization, or An organization that is controlled by, and operated for the exclusive benefit of, a governmental unit or a publicly supported charity. 1040x efile The organization also must have a commitment to protect the conservation purposes of the donation and must have the resources to enforce the restrictions. 1040x efile Conservation purposes. 1040x efile   Your contribution must be made only for one of the following conservation purposes. 1040x efile Preserving land areas for outdoor recreation by, or for the education of, the general public. 1040x efile Protecting a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem. 1040x efile Preserving open space, including farmland and forest land, if it yields a significant public benefit. 1040x efile It must be either for the scenic enjoyment of the general public or under a clearly defined federal, state, or local governmental conservation policy. 1040x efile Preserving a historically important land area or a certified historic structure. 1040x efile There must be some visual public access to the property. 1040x efile Factors used in determining the type and amount of public access required include the historical significance of the property, the remoteness or accessibility of the site, and the extent to which intrusions on the privacy of individuals living on the property would be unreasonable. 1040x efile Building in registered historic district. 1040x efile   A contribution after July 25, 2006, of a qualified real property interest that is an easement or other restriction on the exterior of a building in a registered historic district is deductible only if it meets all of the following three conditions. 1040x efile The restriction must preserve the entire exterior of the building and must prohibit any change to the exterior of the building that is inconsistent with its historical character. 1040x efile You and the organization receiving the contribution must enter into a written agreement certifying, that the organization is a qualified organization and that it has the resources and commitment to maintain the property as donated. 1040x efile If you make the contribution in a tax year beginning after August 17, 2006, you must include with your return: A qualified appraisal, Photographs of the building's entire exterior, and A description of all restrictions on development of the building, such as zoning laws and restrictive covenants. 1040x efile   If you make this type of contribution after February 12, 2007, and claim a deduction of more than $10,000, your deduction will not be allowed unless you pay a $500 filing fee. 1040x efile See Form 8283-V, Payment Voucher for Filing Fee Under Section 170(f)(13), and its instructions. 1040x efile Qualified real property interest. 1040x efile   This is any of the following interests in real property. 1040x efile Your entire interest in real estate other than a mineral interest (subsurface oil, gas, or other minerals, and the right of access to these minerals). 1040x efile A remainder interest. 1040x efile A restriction (granted in perpetuity) on the use that may be made of the real property. 1040x efile Valuation. 1040x efile   A qualified real property interest described in (1) should be valued in a manner that is consistent with the type of interest transferred. 1040x efile If you transferred all the interest in the property, the FMV of the property is the amount of the contribution. 1040x efile If you do not transfer the mineral interest, the FMV of the surface rights in the property is the amount of the contribution. 1040x efile   If you owned only a remainder interest or an income interest (life estate), see Undivided Part of Your Entire Interest, earlier. 1040x efile If you owned the entire property but transferred only a remainder interest (item (2)), see Remainder Interest in Real Property, earlier. 1040x efile   In determining the value of restrictions, you should take into account the selling price in arm's-length transactions of other properties that have comparable restrictions. 1040x efile If there are no comparable sales, the restrictions are valued indirectly as the difference between the FMVs of the property involved before and after the grant of the restriction. 1040x efile   The FMV of the property before contribution of the restriction should take into account not only current use but the likelihood that the property, without the restriction, would be developed. 1040x efile You should also consider any zoning, conservation, or historical preservation laws that would restrict development. 1040x efile Granting an easement may increase, rather than reduce, the value of property, and in such a situation no deduction would be allowed. 1040x efile Example. 1040x efile   You own 10 acres of farmland. 1040x efile Similar land in the area has an FMV of $2,000 an acre. 1040x efile However, land in the general area that is restricted solely to farm use has an FMV of $1,500 an acre. 1040x efile Your county wants to preserve open space and prevent further development in your area. 1040x efile   You grant to the county an enforceable open space easement in perpetuity on 8 of the 10 acres, restricting its use to farmland. 1040x efile The value of this easement is $4,000, determined as follows: FMV of the property before granting easement:   $2,000 × 10 acres $20,000 FMV of the property after granting easement:   $1,500 × 8 acres $12,000   $2,000 × 2 acres 4,000 16,000 Value of easement   $4,000   If you later transfer in fee your remaining interest in the 8 acres to another qualified organization, the FMV of your remaining interest is the FMV of the 8 acres reduced by the FMV of the easement granted to the first organization. 1040x efile More information. 1040x efile   For more information about qualified conservation contributions, see Publication 526. 1040x efile Appraisals Appraisals are not necessary for items of property for which you claim a deduction of $5,000 or less. 1040x efile (There is one exception, described next, for certain clothing and household items. 1040x efile ) However, you generally will need an appraisal for donated property for which you claim a deduction of more than $5,000. 1040x efile There are exceptions. 1040x efile See Deductions of More Than $5,000, later. 1040x efile The weight given an appraisal depends on the completeness of the report, the qualifications of the appraiser, and the appraiser's demonstrated knowledge of the donated property. 1040x efile An appraisal must give all the facts on which to base an intelligent judgment of the value of the property. 1040x efile The appraisal will not be given much weight if: All the factors that apply are not considered, The opinion is not supported with facts, such as purchase price and comparable sales, or The opinion is not consistent with known facts. 1040x efile The appraiser's opinion is never more valid than the facts on which it is based; without these facts it is simply a guess. 1040x efile The opinion of a person claiming to be an expert is not binding on the Internal Revenue Service. 1040x efile All facts associated with the donation must be considered. 1040x efile Deduction over $500 for certain clothing or household items. 1040x efile   You must include with your return a qualified appraisal of any single item of clothing or any household item that is not in good used condition or better, that you donated after August 17, 2006, and for which you deduct more than $500. 1040x efile See Household Goods and Used Clothing, earlier. 1040x efile Cost of appraisals. 1040x efile   You may not take a charitable contribution deduction for fees you pay for appraisals of your donated property. 1040x efile However, these fees may qualify as a miscellaneous deduction, subject to the 2% limit, on Schedule A (Form 1040) if paid to determine the amount allowable as a charitable contribution. 1040x efile Deductions of More Than $5,000 Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, you must get a qualified appraisal made by a qualified appraiser, and you must attach Section B of Form 8283 to your tax return. 1040x efile There are exceptions, discussed later. 1040x efile You should keep the appraiser's report with your written records. 1040x efile Records are discussed in Publication 526. 1040x efile The phrase “similar items” means property of the same generic category or type (whether or not donated to the same donee), such as stamp collections, coin collections, lithographs, paintings, photographs, books, nonpublicly traded stock, nonpublicly traded securities other than nonpublicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver. 1040x efile For example, if you give books to three schools and you deduct $2,000, $2,500, and $900, respectively, your claimed deduction is more than $5,000 for these books. 1040x efile You must get a qualified appraisal of the books and for each school you must attach a fully completed Form 8283, Section B, to your tax return. 1040x efile Exceptions. 1040x efile   You do not need an appraisal if the property is: Nonpublicly traded stock of $10,000 or less, A vehicle (including a car, boat, or airplane) for which your deduction is limited to the gross proceeds from its sale, Qualified intellectual property, such as a patent, Certain publicly traded securities described next, Inventory and other property donated by a corporation that are “qualified contributions” for the care of the ill, the needy, or infants, within the meaning of section 170(e)(3)(A) of the Internal Revenue Code, or Stock in trade, inventory, or property held primarily for sale to customers in the ordinary course of your trade or business. 1040x efile   Although an appraisal is not required for the types of property just listed, you must provide certain information about a donation of any of these types of property on Form 8283. 1040x efile Publicly traded securities. 1040x efile   Even if your claimed deduction is more than $5,000, neither a qualified appraisal nor Section B of Form 8283 is required for publicly traded securities that are: Listed on a stock exchange in which quotations are published on a daily basis, Regularly traded in a national or regional over-the-counter market for which published quotations are available, or Shares of an open-end investment company (mutual fund) for which quotations are published on a daily basis in a newspaper of general circulation throughout the United States. 1040x efile Publicly traded securities that meet these requirements must be reported on Form 8283, Section A. 1040x efile   A qualified appraisal is not required, but Form 8283, Section B, Parts I and IV, must be completed, for an issue of a security that does not meet the requirements just listed but does meet these requirements: The issue is regularly traded during the computation period (defined later) in a market for which there is an “interdealer quotation system” (defined later), The issuer or agent computes the “average trading price” (defined later) for the same issue for the computation period, The average trading price and total volume of the issue during the computation period are published in a newspaper of general circulation throughout the United States, not later than the last day of the month following the end of the calendar quarter in which the computation period ends, The issuer or agent keeps books and records that list for each transaction during the computation period the date of settlement of the transaction, the name and address of the broker or dealer making the market in which the transaction occurred, and the trading price and volume, and The issuer or agent permits the Internal Revenue Service to review the books and records described in item (4) with respect to transactions during the computation period upon receiving reasonable notice. 1040x efile   An interdealer quotation system is any system of general circulation to brokers and dealers that regularly disseminates quotations of obligations by two or more identified brokers or dealers who are not related to either the issuer or agent who computes the average trading price of the security. 1040x efile A quotation sheet prepared and distributed by a broker or dealer in the regular course of business and containing only quotations of that broker or dealer is not an interdealer quotation system. 1040x efile   The average trading price is the average price of all transactions (weighted by volume), other than original issue or redemption transactions, conducted through a United States office of a broker or dealer who maintains a market in the issue of the security during the computation period. 1040x efile Bid and asked quotations are not taken into account. 1040x efile   The computation period is weekly during October through December and monthly during January through September. 1040x efile The weekly computation periods during October through December begin with the first Monday in October and end with the first Sunday following the last Monday in December. 1040x efile Nonpublicly traded stock. 1040x efile   If you contribute nonpublicly traded stock, for which you claim a deduction of $10,000 or less, a qualified appraisal is not required. 1040x efile However, you must attach Form 8283 to your tax return, with Section B, Parts I and IV, completed. 1040x efile Deductions of More Than $500,000 If you claim a deduction of more than $500,000 for a donation of property, you must attach a qualified appraisal of the property to your return. 1040x efile This does not apply to contributions of cash, inventory, publicly traded stock, or intellectual property. 1040x efile If you do not attach the appraisal, you cannot deduct your contribution, unless your failure to attach the appraisal is due to reasonable cause and not to willful neglect. 1040x efile Qualified Appraisal Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, you must get a qualified appraisal made by a qualified appraiser. 1040x efile You must also complete Form 8283, Section B, and attach it to your tax return. 1040x efile See Deductions of More Than $5,000, earlier. 1040x efile A qualified appraisal is an appraisal document that: Is made, signed, and dated by a qualified appraiser (defined later) in accordance with generally accepted appraisal standards, Meets the relevant requirements of Regulations section 1. 1040x efile 170A-13(c)(3) and Notice 2006-96, 2006-46 I. 1040x efile R. 1040x efile B. 1040x efile 902 (available at www. 1040x efile irs. 1040x efile gov/irb/2006-46_IRB/ar13. 1040x efile html), Relates to an appraisal made not earlier than 60 days before the date of contribution of the appraised property, Does not involve a prohibited appraisal fee, and Includes certain information (covered later). 1040x efile You must receive the qualified appraisal before the due date, including extensions, of the return on which a charitable contribution deduction is first claimed for the donated property. 1040x efile If the deduction is first claimed on an amended return, the qualified appraisal must be received before the date on which the amended return is filed. 1040x efile Form 8283, Section B, must be attached to your tax return. 1040x efile Generally, you do not need to attach the qualified appraisal itself, but you should keep a copy as long as it may be relevant under the tax law. 1040x efile There are four exceptions. 1040x efile If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the appraisal. 1040x efile See Paintings, Antiques, and Other Objects of Art, earlier. 1040x efile If you claim a deduction of more than $500,000 for a donation of property, you must attach the appraisal. 1040x efile See Deductions of More Than $500,000, earlier. 1040x efile If you claim a deduction of more than $500 for an article of clothing, or a household item, that is not in good used condition or better, that you donated after August 17, 2006, you must attach the appraisal. 1040x efile See Deduction over $500 for certain clothing or household items, earlier. 1040x efile If you claim a deduction in a tax year beginning after August 17, 2006, for an easement or other restriction on the exterior of a building in a historic district, you must attach the appraisal. 1040x efile See Building in registered historic district, earlier. 1040x efile Prohibited appraisal fee. 1040x efile   Generally, no part of the fee arrangement for a qualified appraisal can be based on a percentage of the appraised value of the property. 1040x efile If a fee arrangement is based on what is allowed as a deduction, after Internal Revenue Service examination or otherwise, it is treated as a fee based on a percentage of appraised value. 1040x efile However, appraisals are not disqualified when an otherwise prohi
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Understanding your CP504B Notice

You have an unpaid amount due on your account. If you do not pay the amount due immediately, the
IRS will seize (levy) certain property or rights to property and apply it to pay the
amount you owe.

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully — it explains your due date, amount due, and payment options.
  • Make your payment by your due date. Go to the payments page to find out more about your payment options.

You may want to...


Answers to Common Questions

What is the notice telling me?
This notice is telling you that we intend to issue a levy against certain property or rights to property because you still have a balance due on one of your tax accounts. You must pay this amount immediately to avoid this. It is also telling you that we will begin searching for other assets on which to issue a levy. We may also file a Federal Tax Lien, if we have not already done so.

What do I have to do?
Pay the amount due shown on the notice. Mail us your payment in the envelope we sent you. Include the bottom part of the notice to make sure we correctly credit your account.

If you can't pay the whole amount now, call us at the number printed at the top of the notice to see if you qualify for an installment agreement.

How much time do I have?
You should pay your balance due by the due date shown on your notice.

What happens if I don't pay or contact the IRS?
If you don't pay the amount due, we may send you a notice giving you a right to a hearing before the IRS Office of Appeals if you have not already received such a notice. We may then seize ("levy") your property or rights to property. Property includes:

  • Wages, real estate commissions, and other income
  • Bank accounts
  • Business assets
  • Personal assets (including your car and home)
  • Social Security benefits

This is your notice of intent to levy as required by Internal Revenue Code section 6331(d).

If you don't pay the amount due or call us to make payment arrangements, we can file a Notice of Federal Tax Lien on your property at any time, if we haven’t already done so.

If the lien is in place, you may find it difficult to sell or borrow against your property. The tax lien would also appear on your credit report ― which may harm your credit rating ― and your creditors would also be publicly notified that the IRS has priority to seize your property.

Who should I contact?
If you have any questions about the notice, call us at the number printed at the top of the notice. A customer service representative will assist you.

What if I don't agree or have already taken corrective action?
If you do not agree with this notice, contact us immediately at the number printed at the top of the notice. We will do our best to help you. If you have already paid this liability or arranged to pay it with an installment agreement, you should still call us at the number printed at the top of the notice to make sure your account reflects this.

Page Last Reviewed or Updated: 05-Mar-2014

The 1040x Efile

1040x efile Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 1040x efile Cost Basis The basis of property you buy is usually its cost. 1040x efile The cost is the amount you pay in cash, debt obligations, other property, or services. 1040x efile Your cost also includes amounts you pay for the following items. 1040x efile 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 assumed for the seller). 1040x efile  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. 1040x efile Loans with low or no interest. 1040x efile   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. 1040x efile You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040x efile For more information, see Unstated Interest and Original Issue Discount in Publication 537. 1040x efile Purchase of a business. 1040x efile   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. 1040x efile Allocate the price among the various assets, including any section 197 intangibles. 1040x efile See Allocating the Basis, later. 1040x efile Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. 1040x efile If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. 1040x efile You must adjust the basis of stocks for certain events that occur after purchase. 1040x efile See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. 1040x efile Identifying stock or bonds sold. 1040x efile   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 stock or bonds. 1040x efile 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. 1040x efile For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 1040x efile Mutual fund shares. 1040x efile   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. 1040x efile For more information, see Publication 550. 1040x efile Real Property Real property, also called real estate, is land and generally anything built on or attached to it. 1040x efile If you buy real property, certain fees and other expenses become part of your cost basis in the property. 1040x efile Real estate taxes. 1040x efile   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. 1040x efile You cannot deduct them as taxes. 1040x efile   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. 1040x efile Do not include that amount in the basis of the property. 1040x efile If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 1040x efile Settlement costs. 1040x efile   Your basis includes the settlement fees and closing costs for buying property. 1040x efile You cannot include in your basis the fees and costs for getting a loan on property. 1040x efile A fee for buying property is a cost that must be paid even if you bought the property for cash. 1040x efile   The following items are some of the settlement fees or closing costs you can include in the basis of your property. 1040x efile Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and 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. 1040x efile   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040x efile   The following items are some settlement fees and closing costs you cannot include in the basis of the property. 1040x efile Casualty insurance premiums. 1040x efile Rent for occupancy of the property before closing. 1040x efile Charges for utilities or other services related to occupancy of the property before closing. 1040x efile Charges connected with getting a loan. 1040x efile The following are examples of these charges. 1040x efile Points (discount points, loan origination fees). 1040x efile Mortgage insurance premiums. 1040x efile Loan assumption fees. 1040x efile Cost of a credit report. 1040x efile Fees for an appraisal required by a lender. 1040x efile Fees for refinancing a mortgage. 1040x efile If these costs relate to business property, items (1) through (3) are deductible as business expenses. 1040x efile Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. 1040x efile Points. 1040x efile   If you pay points to obtain 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. 1040x efile Generally, you deduct the points over the term of the loan. 1040x efile For more information on how to deduct points, see Points in chapter 4 of Publication 535. 1040x efile Points on home mortgage. 1040x efile   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. 1040x efile If certain requirements are met, you can deduct the points in full for the year in which they are paid. 1040x efile Reduce the basis of your home by any seller-paid points. 1040x efile For more information, see Points in Publication 936, Home Mortgage Interest Deduction. 1040x efile Assumption of mortgage. 1040x efile   If you buy property and assume (or buy 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. 1040x efile Example. 1040x efile If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. 1040x efile Constructing assets. 1040x efile   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040x efile Some of these expenses include the following costs. 1040x efile Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 1040x efile In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. 1040x efile You must include them in the asset's basis. 1040x efile Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. 1040x efile    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 1040x efile Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. 1040x efile If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. 1040x efile In certain circumstances, you may be subject to the uniform capitalization rules, next. 1040x efile Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. 1040x efile Activities subject to the rules. 1040x efile   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. 1040x efile Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. 1040x efile However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. 1040x efile   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. 1040x efile Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. 1040x efile Tangible personal property includes films, sound recordings, video tapes, books, or similar property. 1040x efile    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. 1040x efile To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. 1040x efile You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040x efile   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. 1040x efile Example. 1040x efile If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. 1040x efile The nondeductible part of the cost is not subject to the uniform capitalization rules. 1040x efile More information. 1040x efile   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. 1040x efile Exceptions. 1040x efile   The following are not subject to the uniform capitalization rules. 1040x efile Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. 1040x efile For other exceptions to the uniform capitalization rules, see section 1. 1040x efile 263A-1(b) of the regulations. 1040x efile   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. 1040x efile Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. 1040x efile The basis of an intangible asset is usually the cost to buy or create it. 1040x efile If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. 1040x efile The basis of certain intangibles can be amortized. 1040x efile See chapter 8 of Publication 535 for information on the amortization of these costs. 1040x efile Patents. 1040x efile   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. 1040x efile If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. 1040x efile The value of the inventor's time spent on an invention is not part of the basis. 1040x efile Copyrights. 1040x efile   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. 1040x efile Do not include the value of your time as the author, or any other person's time you did not pay for. 1040x efile Franchises, trademarks, and trade names. 1040x efile   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. 1040x efile Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. 1040x efile You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040x efile See Trade or Business Acquired below. 1040x efile Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. 1040x efile If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 1040x efile However, see Trade or Business Acquired, next. 1040x efile Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. 1040x efile Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. 1040x efile Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. 1040x efile Certificates of deposit, U. 1040x efile S. 1040x efile Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040x efile Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. 1040x efile Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. 1040x efile All other assets except section 197 intangibles, goodwill, and going concern value. 1040x efile Section 197 intangibles except goodwill and going concern value. 1040x efile Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 1040x efile Agreement. 1040x efile   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. 1040x efile This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040x efile Reporting requirement. 1040x efile   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 1040x efile Use Form 8594 to provide this information. 1040x efile The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040x efile More information. 1040x efile   See Sale of a Business in chapter 2 of Publication 544 for more information. 1040x efile Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. 1040x efile Figure the basis of each asset by multiplying the lump sum by a fraction. 1040x efile The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040x efile If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. 1040x efile Demolition of building. 1040x efile   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. 1040x efile Do not claim the costs as a current deduction. 1040x efile Modification of building. 1040x efile   A modification of a building will not be treated as a demolition if the following conditions are satisfied. 1040x efile 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. 1040x efile   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. 1040x efile   If these conditions are met, add the costs of the modifications to the basis of the building. 1040x efile Subdivided lots. 1040x efile   If you buy a tract of land and subdivide it, you must determine the basis of each lot. 1040x efile This is necessary because you must figure the gain or loss on the sale of each individual lot. 1040x efile As a result, you do not recover your entire cost in the tract until you have sold all of the lots. 1040x efile   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. 1040x efile The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. 1040x efile Future improvement costs. 1040x efile   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. 1040x efile See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. 1040x efile Use of erroneous cost basis. 1040x efile   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. 1040x efile Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. 1040x efile Example. 1040x efile You bought a tract of land to which you assigned a cost of $15,000. 1040x efile You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. 1040x efile You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. 1040x efile Several years later you determine that your original basis in the tract was $22,500 and not $15,000. 1040x efile You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. 1040x efile You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). 1040x efile You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. 1040x efile Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. 1040x efile The result of these adjustments to the basis is the adjusted basis. 1040x efile Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040x efile These include the cost of any improvements having a useful life of more than 1 year. 1040x efile Rehabilitation expenses also increase basis. 1040x efile However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. 1040x efile If you have to recapture any of the credit, increase your basis by the recaptured amount. 1040x efile If you make additions or improvements to business property, keep separate accounts for them. 1040x efile Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. 1040x efile For more information, see Publication 946. 1040x efile The following items increase the basis of property. 1040x efile The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. 1040x efile Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040x efile Do not deduct them as taxes. 1040x efile However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. 1040x efile Example. 1040x efile Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. 1040x efile Add the assessment to your property's basis. 1040x efile In this example, the assessment is a depreciable asset. 1040x efile Deducting vs. 1040x efile Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. 1040x efile For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. 1040x efile However, you can choose either to deduct or to capitalize certain other costs. 1040x efile If you capitalize these costs, include them in your basis. 1040x efile If you deduct them, do not include them in your basis. 1040x efile See Uniform Capitalization Rules earlier. 1040x efile The costs you can choose to deduct or to capitalize include the following. 1040x efile Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. 1040x efile If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. 1040x efile For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. 1040x efile Table 1. 1040x efile Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. 1040x efile Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. 1040x efile Some of these items are discussed next. 1040x efile Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. 1040x efile You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. 1040x efile To make this determination, compare the repaired property to the property before the casualty. 1040x efile For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. 1040x efile Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. 1040x efile It reduces the basis of the affected part of the property. 1040x efile 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. 1040x efile Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. 1040x efile For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. 1040x efile Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. 1040x efile This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. 1040x efile If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. 1040x efile Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 1040x efile For more information about the section 179 deduction, see Publication 946. 1040x efile Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. 1040x efile Reduce the basis of the property for which you received the subsidy by the excluded amount. 1040x efile For more information on this subsidy, see Publication 525. 1040x efile Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1040x efile If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 1040x efile If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040x efile Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. 1040x efile If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. 1040x efile In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. 1040x efile For information on figuring depreciation, see Publication 946. 1040x efile If you are claiming depreciation on a business vehicle, see Publication 463. 1040x efile If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. 1040x efile Include the excess depreciation in your gross income and add it to your basis in the property. 1040x efile For information on the computation of excess depreciation, see chapter 4 in Publication 463. 1040x efile Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 1040x efile A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040x efile You can exclude canceled debt from income in the following situations. 1040x efile Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). 1040x efile If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040x efile However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. 1040x efile For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. 1040x efile For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. 1040x efile For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. 1040x efile Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. 1040x efile For more information on the rules for the sale of a home, see Publication 523. 1040x efile Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. 1040x efile This also applies to amounts you received under an employer's adoption assistance program and excluded from income. 1040x efile For more information Form 8839, Qualified Adoption Expenses. 1040x efile Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. 1040x efile You must reduce your basis in that property by the credit claimed. 1040x efile For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. 1040x efile Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. 1040x efile You also paid commissions of $2,000 and title search and legal fees of $600. 1040x efile You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. 1040x efile Immediately you spent $20,000 in remodeling the building before you placed it in service. 1040x efile You were allowed depreciation of $14,526 for the years 2005 through 2009. 1040x efile In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. 1040x efile You claimed a deduction for this loss. 1040x efile You spent $5,500 to repair the damages and extend the useful life of the building. 1040x efile The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. 1040x efile It is not affected by any of the above adjustments. 1040x efile Basis Other Than Cost There are many times when you cannot use cost as basis. 1040x efile In these cases, the fair market value or the adjusted basis of property may be used. 1040x efile Adjusted basis is discussed earlier. 1040x efile Fair market value (FMV). 1040x efile   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 1040x efile Sales of similar property on or about the same date may be helpful in figuring the property's FMV. 1040x efile Property Received for Services If you receive property for services, include the property's FMV in income. 1040x efile The amount you include in income becomes your basis. 1040x efile 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. 1040x efile Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. 1040x efile If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. 1040x efile Your basis in the property is its FMV (your purchase price plus the amount you include in income). 1040x efile If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. 1040x efile However, your basis in the property is still its FMV. 1040x efile See Employee Discounts in Publication 15-B. 1040x efile Restricted Property 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 unless you make the election discussed later. 1040x efile Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. 1040x efile There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. 1040x efile When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. 1040x efile Example. 1040x efile Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. 1040x efile The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. 1040x efile You do not report any income until you have completed the 5 years of service that satisfy the condition. 1040x efile Fair market value. 1040x efile   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. 1040x efile Example. 1040x efile You received stock from your employer for services you performed. 1040x efile If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. 1040x efile At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. 1040x efile This is a restriction that by its terms will never end and you must consider it when you figure the FMV. 1040x efile Election. 1040x efile   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. 1040x efile If you make this choice, the substantially vested rules do not apply. 1040x efile Your basis is the amount you paid plus the amount you included in income. 1040x efile   See the discussion of Restricted Property in Publication 525 for more information. 1040x efile Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 1040x efile A taxable gain or deductible loss is also known as a recognized gain or loss. 1040x efile If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. 1040x efile A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. 1040x efile Example. 1040x efile You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. 1040x efile You must report a taxable gain of $3,000 for the land. 1040x efile The tractor has a basis of $6,000. 1040x efile Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. 1040x efile Similar or related property. 1040x efile   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. 1040x efile However, make the following adjustments. 1040x efile Decrease the basis by the following. 1040x efile Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. 1040x efile Increase the basis by the following. 1040x efile Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. 1040x efile Money or property not similar or related. 1040x efile   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 new property is its cost decreased by the gain not recognized on the conversion. 1040x efile Example. 1040x efile The state condemned your property. 1040x efile The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. 1040x efile You realized a gain of $5,000 ($31,000 − $26,000). 1040x efile You bought replacement property similar in use to the converted property for $29,000. 1040x efile You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 1040x efile Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 1040x efile The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. 1040x efile   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040x efile Example. 1040x efile The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. 1040x efile Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. 1040x efile More information. 1040x efile   For more information about condemnations, see Involuntary Conversions in Publication 544. 1040x efile For more information about casualty and theft losses, see Publication 547. 1040x efile Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040x efile If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040x efile A nontaxable gain or loss is also known as an unrecognized gain or loss. 1040x efile Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040x efile To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 1040x efile There must also be an exchange of like-kind property. 1040x efile For more information, see Like-Kind Exchanges in Publication 544. 1040x efile The basis of the property you receive is the same as the basis of the property you gave up. 1040x efile Example. 1040x efile You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. 1040x efile Your basis in the new property is the same as the basis of the old ($50,000). 1040x efile Exchange expenses. 1040x efile   Exchange expenses are generally the closing costs you pay. 1040x efile They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. 1040x efile Add them to the basis of the like-kind property received. 1040x efile Property plus cash. 1040x efile   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. 1040x efile Example. 1040x efile You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. 1040x efile Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). 1040x efile Special rules for related persons. 1040x efile   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 1040x efile Each person must report any gain or loss not recognized on the original exchange. 1040x efile Each person reports it on the tax return filed for the year in which the later disposition occurs. 1040x efile If this rule applies, the basis of the property received in the original exchange will be its fair market value. 1040x efile   These rules generally do not apply to the following kinds of property dispositions. 1040x efile Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. 1040x efile Related persons. 1040x efile   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. 1040x efile   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. 1040x efile ), see Nondeductible Loss in chapter 2 of Publication 544. 1040x efile Exchange of business property. 1040x efile   Exchanging the assets of one business for the assets of another business is a multiple property exchange. 1040x efile For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x efile Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. 1040x efile The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. 1040x efile Decrease the basis by the following amounts. 1040x efile Any money you receive, and Any loss you recognize on the exchange. 1040x efile Increase the basis by the following amounts. 1040x efile Any additional costs you incur, and Any gain you recognize on the exchange. 1040x efile If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040x efile Example. 1040x efile You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. 1040x efile You realized a gain of $200 ($6,200 − $6,000). 1040x efile This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). 1040x efile You include all the gain in income (recognized gain) because the gain is less than the cash received. 1040x efile Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. 1040x efile   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040x efile The rest is the basis of the like property. 1040x efile Example. 1040x efile You had an adjusted basis of $15,000 in real estate you held for investment. 1040x efile You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. 1040x efile The truck is unlike property. 1040x efile You realized a gain of $1,500 ($16,500 − $15,000). 1040x efile This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). 1040x efile You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 1040x efile Your basis in the properties you received is figured as follows. 1040x efile Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). 1040x efile This is the truck's FMV. 1040x efile The rest ($12,500) is the basis of the real estate. 1040x efile Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 1040x efile Example. 1040x efile You are a salesperson and you use one of your cars 100% for business. 1040x efile You have used this car in your sales activities for 2 years and have depreciated it. 1040x efile Your adjusted basis in the car is $22,600 and its FMV is $23,100. 1040x efile You are interested in a new car, which sells for $28,000. 1040x efile If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). 1040x efile However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. 1040x efile Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). 1040x efile Your basis for depreciating the new car is $27,500, the same as if you traded the old car. 1040x efile Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. 1040x efile The first is an exchange of like-kind property. 1040x efile The second is personal-use property on which gain is recognized and loss is not recognized. 1040x efile First, figure your adjusted basis in the property as if you transferred two separate properties. 1040x efile Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. 1040x efile Deduct the depreciation you took or could have taken from the adjusted basis of the business part. 1040x efile Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. 1040x efile The business part of the property is permitted to be exchanged tax free. 1040x efile However, you must recognize any gain from the exchange of the nonbusiness part. 1040x efile You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. 1040x efile The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. 1040x efile If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. 1040x efile For more information, see Publication 523. 1040x efile Trade of car used partly in business. 1040x efile   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. 1040x efile   For information on figuring your basis for depreciation, see Publication 463. 1040x efile Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. 1040x efile However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. 1040x efile This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. 1040x efile If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. 1040x efile 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. 1040x efile For more information on these bonds, see Publication 550. 1040x efile At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. 1040x efile For more information, see Publication 504, Divorced or Separated Individuals. 1040x efile Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. 1040x efile FMV Less Than Donor's Adjusted Basis 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. 1040x efile Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. 1040x efile Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). 1040x efile If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. 1040x efile Example. 1040x efile You received an acre of land as a gift. 1040x efile At the time of the gift, the land had an FMV of $8,000. 1040x efile The donor's adjusted basis was $10,000. 1040x efile After you received the land, no events occurred to increase or decrease your basis. 1040x efile If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. 1040x efile If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. 1040x efile If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 1040x efile For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. 1040x efile If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. 1040x efile Business property. 1040x efile   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040x efile FMV Equal to or More Than Donor's Adjusted Basis 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. 1040x efile Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040x efile Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. 1040x efile See Adjusted Basis earlier. 1040x efile Gift received before 1977. 1040x efile   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. 1040x efile However, do not increase your basis above the FMV of the gift at the time it was given to you. 1040x efile Example 1. 1040x efile You were given a house in 1976 with an FMV of $21,000. 1040x efile The donor's adjusted basis was $20,000. 1040x efile The donor paid a gift tax of $500. 1040x efile Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. 1040x efile Example 2. 1040x efile If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. 1040x efile This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. 1040x efile Gift received after 1976. 1040x efile   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. 1040x efile Figure the increase by multiplying the gift tax paid by a fraction. 1040x efile The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 1040x efile   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. 1040x efile 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. 1040x efile For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 1040x efile Example. 1040x efile In 2010, you received a gift of property from your mother that had an FMV of $50,000. 1040x efile Her adjusted basis was $20,000. 1040x efile The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). 1040x efile She paid a gift tax of $9,000. 1040x efile Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . 1040x efile 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. 1040x efile See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 1040x efile If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. 1040x efile The FMV of the property at the date of the individual's death. 1040x efile The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. 1040x efile For information on the alternate valuation date, see the Instructions for Form 706. 1040x efile The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. 1040x efile This method is discussed later. 1040x efile 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. 1040x efile For information on a qualified conservation easement, see the Instructions for Form 706. 1040x efile 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. 1040x efile For more information, see the Instructions for Form 706. 1040x efile Appreciated property. 1040x efile   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. 1040x efile Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. 1040x efile Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. 1040x efile Community Property 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. 1040x efile 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. 1040x efile For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. 1040x efile For example, you and your spouse owned community property that had a basis of $80,000. 1040x efile When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 1040x efile The FMV of the community interest was $100,000. 1040x efile The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 1040x efile The basis of the other half to your spouse's heirs is also $50,000. 1040x efile For more information on community property, see Publication 555, Community Property. 1040x efile Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. 1040x efile Example. 1040x efile John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. 1040x efile John furnished two-thirds of the purchase price and Jim furnished one-third. 1040x efile Depreciation deductions allowed before John's death were $12,000. 1040x efile Under local law, each had a half interest in the income from the property. 1040x efile At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. 1040x efile Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. 1040x efile This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. 1040x efile If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. 1040x efile Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. 1040x efile It does not matter how much each spouse contributed to the purchase price. 1040x efile Also, it does not matter which spouse dies first. 1040x efile A qualified joint interest is any interest in property held by husband and wife as either of the following. 1040x efile Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. 1040x efile Basis. 1040x efile   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. 1040x efile Decrease the cost by any deductions allowed to you for depreciation and depletion. 1040x efile Increase the reduced cost by your basis in the half you inherited. 1040x efile Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. 1040x efile If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. 1040x efile If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. 1040x efile Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040x efile Special-use valuation. 1040x efile   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. 1040x efile Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 1040x efile Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. 1040x efile Figure all FMVs without regard to the special-use valuation. 1040x efile   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040x efile This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. 1040x efile   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. 1040x efile If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 1040x efile The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. 1040x efile   You make the election by filing with Form 706-A a statement that does all of the following. 1040x efile Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. 1040x efile   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. 1040x efile Property Changed 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 must figure its basis for depreciation. 1040x efile An example of changing property held for personal use to business use would be renting out your former main home. 1040x efile Basis for depreciation. 1040x efile   The basis for depreciation is the lesser of the following amounts. 1040x efile The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 1040x efile Example. 1040x efile Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. 1040x efile 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. 1040x efile Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 1040x efile Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 1040x efile 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. 1040x efile The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). 1040x efile Sale of property. 1040x efile   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. 1040x efile Gain. 1040x efile   The basis for figuring a gain is your adjusted basis when you sell the property. 1040x efile Example. 1040x efile 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. 1040x efile Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 1040x efile Loss. 1040x efile   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. 1040x efile Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. 1040x efile Example. 1040x efile 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. 1040x efile 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) on that date. 1040x efile Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). 1040x efile How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. 1040x efile By selecting the method that is best for you, you will have quick and easy access to tax help. 1040x efile Contacting your Taxpayer Advocate. 1040x efile   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. 1040x efile We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. 1040x efile Here are seven things every taxpayer should know about TAS. 1040x efile TAS is your voice at the IRS. 1040x efile Our service is free, confidential, and tailored to meet your needs. 1040x efile You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. 1040x efile We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. 1040x efile This includes businesses as well as individuals. 1040x efile Our employees know the IRS and how to navigate it. 1040x efile If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. 1040x efile We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. 1040x efile You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. 1040x efile irs. 1040x efile gov/advocate. 1040x efile You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. 1040x efile You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. 1040x efile taxtoolkit. 1040x efile irs. 1040x efile gov. 1040x efile You can get updates on hot tax topics by visiting our YouTube channel at www. 1040x efile youtube. 1040x efile com/tasnta and our Facebook page at www. 1040x efile facebook. 1040x efile com/YourVoiceAtIRS, or by following our tweets at www. 1040x efile twitter. 1040x efile com/YourVoiceAtIRS. 1040x efile Low Income Taxpayer Clinics (LITCs). 1040x efile   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. 1040x efile LITCs are independent from the IRS. 1040x efile Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. 1040x efile If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. 1040x efile For more information, see Publication 4134, Low Income Taxpayer Clinic List. 1040x efile This publication is available at IRS. 1040x efile gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. 1040x efile Free tax services. 1040x efile   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. 1040x efile Learn about free tax information from the IRS, including publications, services, and education and assistance programs. 1040x efile The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. 1040x efile The majority of the information and services listed in this publication are available to you free of charge. 1040x efile If there is a fee associated with a resource or service, it is listed in the publication. 1040x efile   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d