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Irs gov 13. Irs gov   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Irs gov It is divided into the following sections. Irs gov Cost basis. Irs gov Adjusted basis. Irs gov Basis other than cost. Irs gov Your basis is the amount of your investment in property for tax purposes. Irs gov Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Irs gov Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Irs gov If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Irs gov Only the basis allocated to the business or investment use of the property can be depreciated. Irs gov Your original basis in property is adjusted (increased or decreased) by certain events. Irs gov For example, if you make improvements to the property, increase your basis. Irs gov If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Irs gov Keep accurate records of all items that affect the basis of your property. Irs gov For more information on keeping records, see chapter 1. Irs gov Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Irs gov The cost is the amount you pay in cash, debt obligations, other property, or services. Irs gov Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). Irs gov In addition, the basis of real estate and business assets may include other items. Irs gov Loans with low or no interest. Irs gov    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. Irs gov You generally have unstated interest if your interest rate is less than the applicable federal rate. Irs gov   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Irs gov Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Irs gov If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Irs gov Lump sum purchase. Irs gov   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Irs gov Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Irs gov Figure the basis of each asset by multiplying the lump sum by a fraction. Irs gov The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Irs gov    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Irs gov Fair market value (FMV). Irs gov   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Irs gov Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Irs gov Assumption of mortgage. Irs gov   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Irs gov Settlement costs. Irs gov   Your basis includes the settlement fees and closing costs you paid for buying the property. Irs gov (A fee for buying property is a cost that must be paid even if you buy the property for cash. Irs gov ) Do not include fees and costs for getting a loan on the property in your basis. Irs gov   The following are some of the settlement fees or closing costs you can include in the basis of your property. Irs gov Abstract fees (abstract of title fees). Irs gov Charges for installing utility services. Irs gov Legal fees (including fees for the title search and preparation of the sales contract and deed). Irs gov Recording fees. Irs gov Survey fees. Irs gov Transfer taxes. Irs gov Owner's title insurance. Irs gov 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. Irs gov   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Irs gov   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Irs gov Casualty insurance premiums. Irs gov Rent for occupancy of the property before closing. Irs gov Charges for utilities or other services related to occupancy of the property before closing. Irs gov Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Irs gov Fees for refinancing a mortgage. Irs gov Real estate taxes. Irs gov   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. Irs gov You cannot deduct them as an expense. Irs gov    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. Irs gov Do not include that amount in the basis of your property. Irs gov If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Irs gov Points. Irs gov   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Irs gov Generally, you deduct the points over the term of the loan. Irs gov For more information on how to deduct points, see chapter 23. Irs gov Points on home mortgage. Irs gov   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Irs gov If certain requirements are met, you can deduct the points in full for the year in which they are paid. Irs gov Reduce the basis of your home by any seller-paid points. Irs gov Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Irs gov The result is the adjusted basis. Irs gov Increases to Basis Increase the basis of any property by all items properly added to a capital account. Irs gov Examples of items that increase basis are shown in Table 13-1. Irs gov These include the items discussed below. Irs gov Improvements. Irs gov   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Irs gov For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. Irs gov Assessments for local improvements. Irs gov   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Irs gov Do not deduct them as taxes. Irs gov However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Irs gov Example. Irs gov Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Irs gov Add the assessment to your property's basis. Irs gov In this example, the assessment is a depreciable asset. Irs gov Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Irs gov Examples of items that decrease basis are shown in Table 13-1. Irs gov These include the items discussed below. Irs gov Table 13-1. Irs gov Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Irs gov   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Irs gov    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Irs gov   For more information on casualty and theft losses, see chapter 25. Irs gov Depreciation and section 179 deduction. Irs gov   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Irs gov   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Irs gov Example. Irs gov You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Irs gov You added an improvement to the duplex that cost $10,000. Irs gov In February last year, the duplex was damaged by fire. Irs gov Up to that time, you had been allowed depreciation of $23,000. Irs gov You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Irs gov You deducted a casualty loss of $1,000 on your income tax return for last year. Irs gov You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Irs gov You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Irs gov Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Irs gov Your basis in the land is its original cost of $5,000. Irs gov Easements. Irs gov   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Irs gov It reduces the basis of the affected part of the property. Irs gov 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. Irs gov   If the gain is on a capital asset, see chapter 16 for information about how to report it. Irs gov If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Irs gov Exclusion of subsidies for energy conservation measures. Irs gov   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Irs gov Reduce the basis of the property for which you received the subsidy by the excluded amount. Irs gov For more information about this subsidy, see chapter 12. Irs gov Postponed gain from sale of home. Irs gov    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Irs gov For more information on the rules for the sale of a home, see chapter 15. Irs gov Basis Other Than Cost There are many times when you cannot use cost as basis. Irs gov In these cases, the fair market value or the adjusted basis of the property can be used. Irs gov Fair market value (FMV) and adjusted basis were discussed earlier. Irs gov Property Received for Services If you receive property for your services, include the FMV of the property in income. Irs gov The amount you include in income becomes your basis. Irs gov 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. Irs gov Restricted property. Irs gov   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. Irs gov However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Irs gov Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Irs gov For more information, see Restricted Property in Publication 525. Irs gov Bargain purchases. Irs gov   A bargain purchase is a purchase of an item for less than its FMV. Irs gov If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Irs gov Your basis in the property is its FMV (your purchase price plus the amount you include in income). Irs gov   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Irs gov However, your basis in the property is still its FMV. Irs gov See Employee Discounts in Publication 15-B. Irs gov Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Irs gov A taxable gain or deductible loss also is known as a recognized gain or loss. Irs gov If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Irs gov Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Irs gov Similar or related property. Irs gov   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Irs gov Decrease the basis by the following. Irs gov Any loss you recognize on the involuntary conversion. Irs gov Any money you receive that you do not spend on similar property. Irs gov Increase the basis by the following. Irs gov Any gain you recognize on the involuntary conversion. Irs gov Any cost of acquiring the replacement property. Irs gov Money or property not similar or related. Irs gov    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. Irs gov Example. Irs gov The state condemned your property. Irs gov The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Irs gov You realized a gain of $5,000 ($31,000 − $26,000). Irs gov You bought replacement property similar in use to the converted property for $29,000. Irs gov You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Irs gov Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Irs gov The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Irs gov   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Irs gov Basis for depreciation. Irs gov   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Irs gov For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Irs gov Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Irs gov If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Irs gov See Nontaxable Trades in chapter 14. Irs gov Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Irs gov To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Irs gov Qualifying property. Irs gov Like-kind property. Irs gov The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Irs gov If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Irs gov Qualifying property. Irs gov   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Irs gov Like-kind property. Irs gov   There must be an exchange of like-kind property. Irs gov Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Irs gov The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Irs gov Example. Irs gov You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Irs gov The dealer allows you $2,000 on the old truck, and you pay $4,800. Irs gov This is a like-kind exchange. Irs gov The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Irs gov If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Irs gov The basis of the new truck is the price you pay the dealer. Irs gov Partially nontaxable exchanges. Irs gov   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Irs gov The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Irs gov Decrease the basis by the following amounts. Irs gov Any money you receive. Irs gov Any loss you recognize on the exchange. Irs gov Increase the basis by the following amounts. Irs gov Any additional costs you incur. Irs gov Any gain you recognize on the exchange. Irs gov If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Irs gov Allocation of basis. Irs gov   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Irs gov The rest is the basis of the like-kind property. Irs gov More information. Irs gov   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Irs gov Basis for depreciation. Irs gov   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Irs gov For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Irs gov Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Irs gov The same rule applies to a transfer by your former spouse that is incident to divorce. Irs gov However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Irs gov If the property transferred to you is a series E, series EE, or series I U. Irs gov S. Irs gov savings bond, the transferor must include in income the interest accrued to the date of transfer. Irs gov 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. Irs gov For more information on these bonds, see chapter 7. Irs gov At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Irs gov For more information about the transfer of property from a spouse, see chapter 14. Irs gov Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Irs gov FMV less than donor's adjusted basis. Irs gov   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. Irs gov Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Irs gov Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Irs gov See Adjusted Basis , earlier. Irs gov Example. Irs gov You received an acre of land as a gift. Irs gov At the time of the gift, the land had an FMV of $8,000. Irs gov The donor's adjusted basis was $10,000. Irs gov After you received the property, no events occurred to increase or decrease your basis. Irs gov If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Irs gov If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Irs gov If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Irs gov Business property. Irs gov   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Irs gov FMV equal to or greater than donor's adjusted basis. Irs gov   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. Irs gov Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Irs gov   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Irs gov See Adjusted Basis , earlier. Irs gov   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Irs gov Figure the increase by multiplying the gift tax paid by a fraction. Irs gov The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Irs gov   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Irs gov 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. Irs gov Example. Irs gov In 2013, you received a gift of property from your mother that had an FMV of $50,000. Irs gov Her adjusted basis was $20,000. Irs gov The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Irs gov She paid a gift tax of $7,320 on the property. Irs gov Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Irs gov 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Irs gov If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Irs gov However, your basis cannot exceed the FMV of the gift at the time it was given to you. Irs gov Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Irs gov The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Irs gov The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Irs gov 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. Irs gov 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. Irs gov For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Irs gov Property inherited from a decedent who died in 2010. Irs gov   If you inherited property from a decedent who died in 2010, special rules may apply. Irs gov For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Irs gov Community property. Irs gov   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. Irs gov 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. Irs gov For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Irs gov Example. Irs gov You and your spouse owned community property that had a basis of $80,000. Irs gov When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Irs gov The FMV of the community interest was $100,000. Irs gov The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Irs gov The basis of the other half to your spouse's heirs is also $50,000. Irs gov For more information about community property, see Publication 555, Community Property. Irs gov Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. Irs gov To do so, you must figure its basis for depreciation at the time of the change. Irs gov An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Irs gov Basis for depreciation. Irs gov   The basis for depreciation is the lesser of the following amounts. Irs gov The FMV of the property on the date of the change. Irs gov Your adjusted basis on the date of the change. Irs gov Example. Irs gov Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Irs gov 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. Irs gov Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Irs gov Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Irs gov 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. Irs gov The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Irs gov Sale of property. Irs gov   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Irs gov Gain. Irs gov   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Irs gov Example. Irs gov 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. Irs gov Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Irs gov Loss. Irs gov   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. Irs gov Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Irs gov Example. Irs gov 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. Irs gov In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Irs gov Reduce that amount ($180,000) by the depreciation deductions ($37,500). Irs gov The basis for loss is $142,500 ($180,000 − $37,500). Irs gov Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Irs gov If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Irs gov You must adjust the basis of stocks for certain events that occur after purchase. Irs gov For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Irs gov This rule applies only when the additional stock received is identical to the stock held. Irs gov Also reduce your basis when you receive nontaxable distributions. Irs gov They are a return of capital. Irs gov Example. Irs gov In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Irs gov In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Irs gov In 2013 XYZ declared a 2-for-1 stock split. Irs gov You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Irs gov Other basis. Irs gov   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Irs gov For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Irs gov Identifying stocks or bonds sold. Irs gov   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. Irs gov 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. Irs gov For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Irs gov Mutual fund shares. Irs gov   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Irs gov For more information, see Publication 550. Irs gov Bond premium. Irs gov   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Irs gov See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Irs gov Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Irs gov Original issue discount (OID) on debt instruments. Irs gov   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Irs gov See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Irs gov Tax-exempt obligations. Irs gov    OID on tax-exempt obligations is generally not taxable. Irs gov However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Irs gov The accrued OID is added to the basis of the obligation to determine your gain or loss. Irs gov See chapter 4 of Publication 550. Irs gov Prev  Up  Next   Home   More Online Publications
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Irs gov Publication 541 - Introductory Material Table of Contents Reminder IntroductionTax questions. Irs gov Ordering forms and publications. Irs gov Useful Items - You may want to see: Reminder Photographs of missing children. Irs gov  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Irs gov Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Irs gov You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Irs gov Introduction This publication provides supplemental federal income tax information for partnerships and partners. Irs gov It supplements the information provided in the Instructions for Form 1065, U. Irs gov S. Irs gov Return of Partnership Income, and the Partner's Instructions for Schedule K-1 (Form 1065). Irs gov Generally, a partnership does not pay tax on its income but “passes through” any profits or losses to its partners. Irs gov Partners must include partnership items on their tax returns. Irs gov For a discussion of business expenses a partnership can deduct, see Publication 535, Business Expenses. Irs gov Members of oil and gas partnerships should read about the deduction for depletion in chapter 9 of that publication. Irs gov Certain partnerships must have a tax matters partner (TMP) who is also a general partner. Irs gov For information on the rules for designating a TMP, see Designation of Tax Matters Partner (TMP) in the Form 1065 instructions and section 301. Irs gov 6231(a)(7)-1 of the regulations. Irs gov Many rules in this publication do not apply to partnerships that file Form 1065-B, U. Irs gov S. Irs gov Return of Income for Electing Large Partnerships. Irs gov For the rules that apply to these partnerships, see the instructions for Form 1065-B. Irs gov However, the partners of electing large partnerships can use the rules in this publication except as otherwise noted. Irs gov Withholding on foreign partner or firm. Irs gov   If a partnership acquires a U. Irs gov S. Irs gov real property interest from a foreign person or firm, the partnership may have to withhold tax on the amount it pays for the property (including cash, the fair market value of other property, and any assumed liability). Irs gov If a partnership has income effectively connected with a trade or business in the United States, it must withhold on the income allocable to its foreign partners. Irs gov A partnership may have to withhold tax on a foreign partner's distributive share of fixed or determinable income not effectively connected with a U. Irs gov S. Irs gov trade or business. Irs gov A partnership that fails to withhold may be held liable for the tax, applicable penalties, and interest. Irs gov   For more information, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Irs gov Comments and suggestions. Irs gov   We welcome your comments about this publication and your suggestions for future editions. Irs gov   You can write to: Internal Revenue Service Tax Forms and Publications  SE:W:CAR:MP:TFP 1111 Constitution Ave. Irs gov NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Irs gov Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Irs gov    You can send us comments from www. Irs gov irs. Irs gov gov/formspubs. Irs gov Click on “More Information” and then on “Comment on Tax Forms and Publications. Irs gov ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Irs gov Tax questions. Irs gov   If you have a tax question, check the information available at IRS. Irs gov gov or call 1-800-829-4933. Irs gov We cannot answer tax questions at the address listed above. Irs gov Ordering forms and publications. Irs gov    Visit www. Irs gov irs. Irs gov gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the addresses shown under How To Get Tax Help in the back of this publication. Irs gov Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 505 Tax Withholding and Estimated Tax 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 551 Basis of Assets 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property See How To Get Tax Help near the end of this publication for information about getting publications and forms. Irs gov Prev  Up  Next   Home   More Online Publications