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Tax Form 1040 Ez

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Tax Form 1040 Ez

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LT 18 (Letter 1615) Frequently Asked Questions (FAQs)

What is the notice telling me?

We do not have a record of receiving federal income tax returns for the years indicated in the letter.

What do I have to do?

File the returns or contact us to discuss the matter. If you are a wage earner, we usually can provide you with your income and withholding information if you do not have the necessary records to complete your returns. In addition, as allowed under Internal Revenue Code Section 6020B, we will prepare your employment, excise, or partnership returns based on available information such as the last returns you filed. We will figure your tax and send you a bill for that tax, plus interest and penalty charges. This won't be to your advantage.

How much time do I have?

Contact us as soon as possible, but no later than 10 days after the date on the letter.

What happens if I don't file?

We may file the return for you. As allowed under Internal Revenue Code Section 6020B, we will prepare your employment, excise, or partnership returns based on available information such as the last returns you filed. We will figure your tax and send you a bill for that tax, plus interest and penalty charges. This won't be to your advantage.

Who should I contact?

Contact us at the phone number shown in the letter; the person answering will be able to assist you.

What if I don't agree or have already taken corrective action?

If you do not agree with this notice, call us immediately at the number printed at the top of the notice. We will do our best to help you. If you called us about this matter before, but we did not correct the problem, you may want to contact the Office of the Taxpayer Advocate.

If you have already filed the requested return(s), you should still call us at the number printed at the top of the notice to make sure your account reflects this. We may ask you to resubmit the return with an original signature.

Page Last Reviewed or Updated: 30-Jan-2014

The Tax Form 1040 Ez

Tax form 1040 ez 6. Tax form 1040 ez   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Tax form 1040 ez Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Tax form 1040 ez Also use basis to figure depreciation, amortization, depletion, and casualty losses. Tax form 1040 ez If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Tax form 1040 ez Only the basis allocated to the business or investment use of the property can be depreciated. Tax form 1040 ez Your original basis in property is adjusted (increased or decreased) by certain events. Tax form 1040 ez For example, if you make improvements to the property, increase your basis. Tax form 1040 ez If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Tax form 1040 ez Keep accurate records of all items that affect the basis of your assets. Tax form 1040 ez For information on keeping records, see chapter 1. Tax form 1040 ez Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Tax form 1040 ez Cost Basis The basis of property you buy is usually its cost. Tax form 1040 ez Cost is the amount you pay in cash, debt obligations, other property, or services. Tax form 1040 ez Your cost includes amounts you pay for sales tax, freight, installation, and testing. Tax form 1040 ez The basis of real estate and business assets will include other items, discussed later. Tax form 1040 ez Basis generally does not include interest payments. Tax form 1040 ez However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Tax form 1040 ez You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Tax form 1040 ez Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Tax form 1040 ez Loans with low or no interest. Tax form 1040 ez   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. Tax form 1040 ez You generally have unstated interest if your interest rate is less than the applicable federal rate. Tax form 1040 ez See the discussion of unstated interest in Publication 537, Installment Sales. Tax form 1040 ez Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Tax form 1040 ez If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Tax form 1040 ez Some of these expenses are discussed next. Tax form 1040 ez Lump sum purchase. Tax form 1040 ez   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Tax form 1040 ez Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Tax form 1040 ez Figure the basis of each asset by multiplying the lump sum by a fraction. Tax form 1040 ez The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Tax form 1040 ez Fair market value (FMV). Tax form 1040 ez   FMV is the price at which 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 necessary facts. Tax form 1040 ez Sales of similar property on or about the same date may help in figuring the FMV of the property. Tax form 1040 ez If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Tax form 1040 ez Real estate taxes. Tax form 1040 ez   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Tax form 1040 ez   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Tax form 1040 ez Whether or not you reimburse the seller, do not include that amount in the basis of your property. Tax form 1040 ez Settlement costs. Tax form 1040 ez   Your basis includes the settlement fees and closing costs for buying the property. Tax form 1040 ez See Publication 551 for a detailed list of items you can and cannot include in basis. Tax form 1040 ez   Do not include fees and costs for getting a loan on the property. Tax form 1040 ez Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Tax form 1040 ez Points. Tax form 1040 ez   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Tax form 1040 ez You may be able to deduct the points currently or over the term of the loan. Tax form 1040 ez For more information about deducting points, see Points in chapter 4 of Publication 535. Tax form 1040 ez Assumption of a mortgage. Tax form 1040 ez   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Tax form 1040 ez Example. Tax form 1040 ez If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Tax form 1040 ez Constructing assets. Tax form 1040 ez   If you build property or have assets built for you, your expenses for this construction are part of your basis. Tax form 1040 ez Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Tax form 1040 ez   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Tax form 1040 ez You must capitalize them (include them in the asset's basis). Tax form 1040 ez Employee wages paid for the construction work, reduced by any employment credits allowed. Tax form 1040 ez Depreciation on equipment you own while it is used in the construction. Tax form 1040 ez Operating and maintenance costs for equipment used in the construction. Tax form 1040 ez The cost of business supplies and materials used in the construction. Tax form 1040 ez    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. Tax form 1040 ez Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Tax form 1040 ez To determine the basis of these assets or separate items, there must be an allocation of basis. Tax form 1040 ez Group of assets acquired. Tax form 1040 ez   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Tax form 1040 ez Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Tax form 1040 ez You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Tax form 1040 ez 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. Tax form 1040 ez Farming business acquired. Tax form 1040 ez   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Tax form 1040 ez Generally, reduce the purchase price by any cash received. Tax form 1040 ez Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Tax form 1040 ez See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Tax form 1040 ez Transplanted embryo. Tax form 1040 ez   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Tax form 1040 ez Allocate the rest of the purchase price to the basis of the calf. Tax form 1040 ez Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Tax form 1040 ez Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Tax form 1040 ez You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Tax form 1040 ez Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Tax form 1040 ez However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Tax form 1040 ez You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Tax form 1040 ez You are not subject to the uniform capitalization rules if the property is produced for personal use. Tax form 1040 ez In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Tax form 1040 ez Plants. Tax form 1040 ez   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Tax form 1040 ez Animals. Tax form 1040 ez   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Tax form 1040 ez The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Tax form 1040 ez Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Tax form 1040 ez For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Tax form 1040 ez For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Tax form 1040 ez Exceptions. Tax form 1040 ez   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Tax form 1040 ez   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Tax form 1040 ez See Accrual Method Required under Accounting Methods in chapter 2. Tax form 1040 ez   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Tax form 1040 ez If you make this election, special rules apply. Tax form 1040 ez This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Tax form 1040 ez This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Tax form 1040 ez    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Tax form 1040 ez See chapter 7, for additional information on depreciation. Tax form 1040 ez Example. Tax form 1040 ez You grow trees that have a preproductive period of more than 2 years. Tax form 1040 ez The trees produce an annual crop. Tax form 1040 ez You are an individual and the uniform capitalization rules apply to your farming business. Tax form 1040 ez You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Tax form 1040 ez You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Tax form 1040 ez Preproductive period of more than 2 years. Tax form 1040 ez   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Tax form 1040 ez Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Tax form 1040 ez Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Tax form 1040 ez More information. Tax form 1040 ez   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Tax form 1040 ez 263A-4. Tax form 1040 ez Table 6-1. Tax form 1040 ez Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Tax form 1040 ez Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts 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 cost basis or basis other than cost (discussed later) of the property. Tax form 1040 ez The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Tax form 1040 ez Increases to Basis Increase the basis of any property by all items properly added to a capital account. Tax form 1040 ez These include the cost of any improvements having a useful life of more than 1 year. Tax form 1040 ez The following costs increase the basis of property. Tax form 1040 ez The cost of extending utility service lines to property. Tax form 1040 ez Legal fees, such as the cost of defending and perfecting title. Tax form 1040 ez Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Tax form 1040 ez Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Tax form 1040 ez Do not deduct these expenses as taxes. Tax form 1040 ez However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Tax form 1040 ez If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Tax form 1040 ez See chapter 7. Tax form 1040 ez Deducting vs. Tax form 1040 ez capitalizing costs. Tax form 1040 ez   Do not add to your basis costs you can deduct as current expenses. Tax form 1040 ez For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Tax form 1040 ez However, you can elect either to deduct or to capitalize certain other costs. Tax form 1040 ez See chapter 7 in Publication 535. Tax form 1040 ez Decreases to Basis The following are some items that reduce the basis of property. Tax form 1040 ez Section 179 deduction. Tax form 1040 ez Deductions previously allowed or allowable for amortization, depreciation, and depletion. Tax form 1040 ez Alternative motor vehicle credit. Tax form 1040 ez See Form 8910. Tax form 1040 ez Alternative fuel vehicle refueling property credit. Tax form 1040 ez See Form 8911. Tax form 1040 ez Residential energy efficient property credits. Tax form 1040 ez See Form 5695. Tax form 1040 ez Investment credit (part or all) taken. Tax form 1040 ez Casualty and theft losses and insurance reimbursements. Tax form 1040 ez Payments you receive for granting an easement. Tax form 1040 ez Exclusion from income of subsidies for energy conservation measures. Tax form 1040 ez Certain canceled debt excluded from income. Tax form 1040 ez Rebates from a manufacturer or seller. Tax form 1040 ez Patronage dividends received from a cooperative association as a result of a purchase of property. Tax form 1040 ez See Patronage Dividends in chapter 3. Tax form 1040 ez Gas-guzzler tax. Tax form 1040 ez See Form 6197. Tax form 1040 ez Some of these items are discussed next. Tax form 1040 ez For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Tax form 1040 ez Depreciation and section 179 deduction. Tax form 1040 ez   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Tax form 1040 ez For more information on these deductions, see chapter 7. Tax form 1040 ez Section 179 deduction. Tax form 1040 ez   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Tax form 1040 ez Depreciation. Tax form 1040 ez   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. Tax form 1040 ez 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. Tax form 1040 ez If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Tax form 1040 ez   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Tax form 1040 ez   See chapter 7 for information on figuring the depreciation you should have claimed. Tax form 1040 ez   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Tax form 1040 ez Casualty and theft losses. Tax form 1040 ez   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Tax form 1040 ez Also, decrease it by any deductible loss not covered by insurance. Tax form 1040 ez See chapter 11 for information about figuring your casualty or theft loss. Tax form 1040 ez   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Tax form 1040 ez To make this determination, compare the repaired property to the property before the casualty. Tax form 1040 ez Easements. Tax form 1040 ez   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Tax form 1040 ez It reduces the basis of the affected part of the property. Tax form 1040 ez If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Tax form 1040 ez See Easements and rights-of-way in chapter 3. Tax form 1040 ez Exclusion from income of subsidies for energy conservation measures. Tax form 1040 ez   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Tax form 1040 ez Reduce the basis of the property by the excluded amount. Tax form 1040 ez Canceled debt excluded from income. Tax form 1040 ez   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. Tax form 1040 ez A debt includes any indebtedness for which you are liable or which attaches to property you hold. Tax form 1040 ez   You can exclude your canceled debt from income if the debt is any of the following. Tax form 1040 ez Debt canceled in a bankruptcy case or when you are insolvent. Tax form 1040 ez Qualified farm debt. Tax form 1040 ez Qualified real property business debt (provided you are not a C corporation). Tax form 1040 ez Qualified principal residence indebtedness. Tax form 1040 ez Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Tax form 1040 ez If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Tax form 1040 ez If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Tax form 1040 ez   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Tax form 1040 ez For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Tax form 1040 ez For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Tax form 1040 ez For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Tax form 1040 ez Basis Other Than Cost There are times when you cannot use cost as basis. Tax form 1040 ez In these situations, the fair market value or the adjusted basis of property may be used. Tax form 1040 ez Examples are discussed next. Tax form 1040 ez Property changed from personal to business or rental use. Tax form 1040 ez   When 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. Tax form 1040 ez An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Tax form 1040 ez   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Tax form 1040 ez   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Tax form 1040 ez The basis for figuring a gain is your adjusted basis in the property when you sell the property. Tax form 1040 ez Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Tax form 1040 ez Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Tax form 1040 ez Property received for services. Tax form 1040 ez   If you receive property for services, include the property's FMV in income. Tax form 1040 ez The amount you include in income becomes your basis. Tax form 1040 ez If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Tax form 1040 ez Example. Tax form 1040 ez George Smith is an accountant and also operates a farming business. Tax form 1040 ez George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Tax form 1040 ez The accounting work and the cow are each worth $1,500. Tax form 1040 ez George must include $1,500 in income for his accounting services. Tax form 1040 ez George's basis in the cow is $1,500. Tax form 1040 ez Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Tax form 1040 ez A taxable gain or deductible loss also is known as a recognized gain or loss. Tax form 1040 ez A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Tax form 1040 ez If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Tax form 1040 ez Example. Tax form 1040 ez You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Tax form 1040 ez You must report a taxable gain of $4,000 for the land. Tax form 1040 ez The tractor has a basis of $6,000. Tax form 1040 ez Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Tax form 1040 ez Similar or related property. Tax form 1040 ez   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Tax form 1040 ez However, make the following adjustments. Tax form 1040 ez Decrease the basis by the following amounts. Tax form 1040 ez Any loss you recognize on the involuntary conversion. Tax form 1040 ez Any money you receive that you do not spend on similar property. Tax form 1040 ez Increase the basis by the following amounts. Tax form 1040 ez Any gain you recognize on the involuntary conversion. Tax form 1040 ez Any cost of acquiring the replacement property. Tax form 1040 ez Money or property not similar or related. Tax form 1040 ez   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 involuntary conversion. Tax form 1040 ez Allocating the basis. Tax form 1040 ez   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Tax form 1040 ez Basis for depreciation. Tax form 1040 ez   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Tax form 1040 ez For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Tax form 1040 ez For more information about involuntary conversions, see chapter 11. Tax form 1040 ez Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Tax form 1040 ez A nontaxable gain or loss also is known as an unrecognized gain or loss. Tax form 1040 ez If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Tax form 1040 ez Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Tax form 1040 ez For an exchange 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. Tax form 1040 ez There must also be an exchange of like-kind property. Tax form 1040 ez For more information, see Like-Kind Exchanges in  chapter 8. Tax form 1040 ez The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Tax form 1040 ez Example 1. Tax form 1040 ez You traded a truck you used in your farming business for a new smaller truck to use in farming. Tax form 1040 ez The adjusted basis of the old truck was $10,000. Tax form 1040 ez The FMV of the new truck is $30,000. Tax form 1040 ez Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Tax form 1040 ez Example 2. Tax form 1040 ez You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Tax form 1040 ez You use both the field cultivator and the planter in your farming business. Tax form 1040 ez The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Tax form 1040 ez   Exchange expenses generally are the closing costs that you pay. Tax form 1040 ez They include such items as brokerage commissions, attorney fees, and deed preparation fees. Tax form 1040 ez Add them to the basis of the like-kind property you receive. Tax form 1040 ez Property plus cash. Tax form 1040 ez   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Tax form 1040 ez Example. Tax form 1040 ez You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Tax form 1040 ez Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Tax form 1040 ez Special rules for related persons. Tax form 1040 ez   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. Tax form 1040 ez Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Tax form 1040 ez Each person reports it on the tax return filed for the year in which the later disposition occurred. Tax form 1040 ez If this rule applies, the basis of the property received in the original exchange will be its FMV. Tax form 1040 ez For more information, see chapter 8. Tax form 1040 ez Exchange of business property. Tax form 1040 ez   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Tax form 1040 ez For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Tax form 1040 ez Basis for depreciation. Tax form 1040 ez   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Tax form 1040 ez For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Tax form 1040 ez Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Tax form 1040 ez The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Tax form 1040 ez Decrease the basis by the following amounts. Tax form 1040 ez Any money you receive. Tax form 1040 ez Any loss you recognize on the exchange. Tax form 1040 ez Increase the basis by the following amounts. Tax form 1040 ez Any additional costs you incur. Tax form 1040 ez Any gain you recognize on the exchange. Tax form 1040 ez If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Tax form 1040 ez Example 1. Tax form 1040 ez You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Tax form 1040 ez You realize a gain of $40,000. Tax form 1040 ez This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Tax form 1040 ez Include your gain in income (recognize gain) only to the extent of the cash received. Tax form 1040 ez Your basis in the land you received is figured as follows. Tax form 1040 ez Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Tax form 1040 ez You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Tax form 1040 ez You realize a gain of $7,250. Tax form 1040 ez This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Tax form 1040 ez You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Tax form 1040 ez Your basis in the truck you received is figured as follows. Tax form 1040 ez Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Tax form 1040 ez   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Tax form 1040 ez The rest is the basis of the like-kind property. Tax form 1040 ez Example. Tax form 1040 ez You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Tax form 1040 ez You also received $1,000 cash and a truck that had an FMV of $3,000. Tax form 1040 ez The truck is unlike property. Tax form 1040 ez You realized a gain of $1,500. Tax form 1040 ez This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Tax form 1040 ez 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. Tax form 1040 ez Your basis in the properties you received is figured as follows. Tax form 1040 ez Adjusted basis of old tractor $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). Tax form 1040 ez This is the truck's FMV. Tax form 1040 ez The rest ($12,500) is the basis of the tractor. Tax form 1040 ez 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. Tax form 1040 ez Example. Tax form 1040 ez You used a tractor on your farm for 3 years. Tax form 1040 ez Its adjusted basis is $22,000 and its FMV is $40,000. Tax form 1040 ez You are interested in a new tractor, which sells for $60,000. Tax form 1040 ez Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Tax form 1040 ez Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Tax form 1040 ez However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Tax form 1040 ez Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Tax form 1040 ez Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Tax form 1040 ez 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. Tax form 1040 ez You also must know its FMV at the time it was given to you and any gift tax paid on it. Tax form 1040 ez FMV equal to or greater than donor's adjusted basis. Tax form 1040 ez   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 when you received the gift. Tax form 1040 ez Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Tax form 1040 ez   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 (the donor's adjusted basis) by any required adjustments to basis while you held the property. Tax form 1040 ez See Adjusted Basis , earlier. Tax form 1040 ez   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Tax form 1040 ez Figure the increase by multiplying the gift tax paid by the following fraction. Tax form 1040 ez Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Tax form 1040 ez The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Tax form 1040 ez Example. Tax form 1040 ez In 2013, you received a gift of property from your mother that had an FMV of $50,000. Tax form 1040 ez Her adjusted basis was $20,000. Tax form 1040 ez The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Tax form 1040 ez She paid a gift tax of $7,320. Tax form 1040 ez Your basis, $26,076, is figured as follows. Tax form 1040 ez Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Tax form 1040 ez 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Tax form 1040 ez If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Tax form 1040 ez However, your basis cannot exceed the FMV of the gift when it was given to you. Tax form 1040 ez FMV less than donor's adjusted basis. Tax form 1040 ez   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Tax form 1040 ez Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Tax form 1040 ez Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Tax form 1040 ez (See Adjusted Basis , earlier. Tax form 1040 ez )   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 get a gain, you have neither gain nor loss on the sale or other disposition of the property. Tax form 1040 ez Example. Tax form 1040 ez You received farmland as a gift from your parents when they retired from farming. Tax form 1040 ez At the time of the gift, the land had an FMV of $80,000. Tax form 1040 ez Your parents' adjusted basis was $100,000. Tax form 1040 ez After you received the land, no events occurred that would increase or decrease your basis. Tax form 1040 ez If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Tax form 1040 ez If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Tax form 1040 ez If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Tax form 1040 ez For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Tax form 1040 ez If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Tax form 1040 ez Business property. Tax form 1040 ez   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Tax form 1040 ez Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Tax form 1040 ez The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Tax form 1040 ez However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Tax form 1040 ez The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Tax form 1040 ez For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Tax form 1040 ez Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Tax form 1040 ez If a federal estate return is filed, you can use its appraised value. Tax form 1040 ez The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Tax form 1040 ez For information on the alternate valuation, see the Instructions for Form 706. Tax form 1040 ez The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Tax form 1040 ez If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Tax form 1040 ez Special-use valuation method. Tax form 1040 ez   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Tax form 1040 ez If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Tax form 1040 ez If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Tax form 1040 ez The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Tax form 1040 ez   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Tax form 1040 ez 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 on the alternate valuation date. Tax form 1040 ez Figure all FMVs without regard to the special-use valuation. Tax form 1040 ez   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Tax form 1040 ez This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Tax form 1040 ez The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Tax form 1040 ez   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Tax form 1040 ez To increase your basis, 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 payment of the additional estate tax. Tax form 1040 ez 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. Tax form 1040 ez The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Tax form 1040 ez   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Tax form 1040 ez   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Tax form 1040 ez Property inherited from a decedent who died in 2010. Tax form 1040 ez   If you inherited property from a decedent who died in 2010, different rules may apply. Tax form 1040 ez See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Tax form 1040 ez Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Tax form 1040 ez Partner's basis. Tax form 1040 ez   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Tax form 1040 ez However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Tax form 1040 ez For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Tax form 1040 ez Shareholder's basis. Tax form 1040 ez   The basis of property distributed by a corporation to a shareholder is its fair market value. Tax form 1040 ez For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Tax form 1040 ez Prev  Up  Next   Home   More Online Publications