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Taxaid com 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). Taxaid com Cost Basis The basis of property you buy is usually its cost. Taxaid com The cost is the amount you pay in cash, debt obligations, other property, or services. Taxaid com Your cost also includes amounts you pay for the following items. Taxaid com 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). Taxaid com  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. Taxaid com Loans with low or no interest. Taxaid com   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. Taxaid com You generally have unstated interest if your interest rate is less than the applicable federal rate. Taxaid com For more information, see Unstated Interest and Original Issue Discount in Publication 537. Taxaid com Purchase of a business. Taxaid com   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. Taxaid com Allocate the price among the various assets, including any section 197 intangibles. Taxaid com See Allocating the Basis, later. Taxaid com 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. Taxaid com 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. Taxaid com You must adjust the basis of stocks for certain events that occur after purchase. Taxaid com See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. Taxaid com Identifying stock or bonds sold. Taxaid com   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. Taxaid com 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. Taxaid com For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Taxaid com Mutual fund shares. Taxaid com   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. Taxaid com For more information, see Publication 550. Taxaid com Real Property Real property, also called real estate, is land and generally anything built on or attached to it. Taxaid com If you buy real property, certain fees and other expenses become part of your cost basis in the property. Taxaid com Real estate taxes. Taxaid com   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. Taxaid com You cannot deduct them as taxes. Taxaid com   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. Taxaid com Do not include that amount in the basis of the property. Taxaid com If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Taxaid com Settlement costs. Taxaid com   Your basis includes the settlement fees and closing costs for buying property. Taxaid com You cannot include in your basis the fees and costs for getting a loan on property. Taxaid com A fee for buying property is a cost that must be paid even if you bought the property for cash. Taxaid com   The following items are some of the settlement fees or closing costs you can include in the basis of your property. Taxaid com 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. Taxaid com   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Taxaid com   The following items are some settlement fees and closing costs you cannot include in the basis of the property. Taxaid com Casualty insurance premiums. Taxaid com Rent for occupancy of the property before closing. Taxaid com Charges for utilities or other services related to occupancy of the property before closing. Taxaid com Charges connected with getting a loan. Taxaid com The following are examples of these charges. Taxaid com Points (discount points, loan origination fees). Taxaid com Mortgage insurance premiums. Taxaid com Loan assumption fees. Taxaid com Cost of a credit report. Taxaid com Fees for an appraisal required by a lender. Taxaid com Fees for refinancing a mortgage. Taxaid com If these costs relate to business property, items (1) through (3) are deductible as business expenses. Taxaid com Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. Taxaid com Points. Taxaid com   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. Taxaid com Generally, you deduct the points over the term of the loan. Taxaid com For more information on how to deduct points, see Points in chapter 4 of Publication 535. Taxaid com Points on home mortgage. Taxaid com   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. Taxaid com If certain requirements are met, you can deduct the points in full for the year in which they are paid. Taxaid com Reduce the basis of your home by any seller-paid points. Taxaid com For more information, see Points in Publication 936, Home Mortgage Interest Deduction. Taxaid com Assumption of mortgage. Taxaid com   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. Taxaid com Example. Taxaid com If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. Taxaid com Constructing assets. Taxaid com   If you build property or have assets built for you, your expenses for this construction are part of your basis. Taxaid com Some of these expenses include the following costs. Taxaid com Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Taxaid com In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. Taxaid com You must include them in the asset's basis. Taxaid com 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. Taxaid com    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. Taxaid com Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. Taxaid com If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. Taxaid com In certain circumstances, you may be subject to the uniform capitalization rules, next. Taxaid com Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. Taxaid com Activities subject to the rules. Taxaid com   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. Taxaid com 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. Taxaid com 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. Taxaid com   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. Taxaid com 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. Taxaid com Tangible personal property includes films, sound recordings, video tapes, books, or similar property. Taxaid com    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. Taxaid com 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. Taxaid com You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Taxaid com   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. Taxaid com Example. Taxaid com 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. Taxaid com The nondeductible part of the cost is not subject to the uniform capitalization rules. Taxaid com More information. Taxaid com   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. Taxaid com Exceptions. Taxaid com   The following are not subject to the uniform capitalization rules. Taxaid com 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. Taxaid com For other exceptions to the uniform capitalization rules, see section 1. Taxaid com 263A-1(b) of the regulations. Taxaid com   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. Taxaid com Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. Taxaid com The basis of an intangible asset is usually the cost to buy or create it. Taxaid com 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. Taxaid com The basis of certain intangibles can be amortized. Taxaid com See chapter 8 of Publication 535 for information on the amortization of these costs. Taxaid com Patents. Taxaid com   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. Taxaid com If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. Taxaid com The value of the inventor's time spent on an invention is not part of the basis. Taxaid com Copyrights. Taxaid com   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. Taxaid com Do not include the value of your time as the author, or any other person's time you did not pay for. Taxaid com Franchises, trademarks, and trade names. Taxaid com   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. Taxaid com Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. Taxaid com You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Taxaid com See Trade or Business Acquired below. Taxaid com 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. Taxaid com 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. Taxaid com However, see Trade or Business Acquired, next. Taxaid com Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Taxaid com Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Taxaid com 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. Taxaid com Certificates of deposit, U. Taxaid com S. Taxaid com Government securities, foreign currency, and actively traded personal property, including stock and securities. Taxaid com Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. Taxaid com 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. Taxaid com All other assets except section 197 intangibles, goodwill, and going concern value. Taxaid com Section 197 intangibles except goodwill and going concern value. Taxaid com Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Taxaid com Agreement. Taxaid com   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. Taxaid com This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Taxaid com Reporting requirement. Taxaid com   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. Taxaid com Use Form 8594 to provide this information. Taxaid com The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Taxaid com More information. Taxaid com   See Sale of a Business in chapter 2 of Publication 544 for more information. Taxaid com 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. Taxaid com Figure the basis of each asset by multiplying the lump sum by a fraction. Taxaid com The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Taxaid com 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. Taxaid com Demolition of building. Taxaid com   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. Taxaid com Do not claim the costs as a current deduction. Taxaid com Modification of building. Taxaid com   A modification of a building will not be treated as a demolition if the following conditions are satisfied. Taxaid com 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. Taxaid com   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. Taxaid com   If these conditions are met, add the costs of the modifications to the basis of the building. Taxaid com Subdivided lots. Taxaid com   If you buy a tract of land and subdivide it, you must determine the basis of each lot. Taxaid com This is necessary because you must figure the gain or loss on the sale of each individual lot. Taxaid com As a result, you do not recover your entire cost in the tract until you have sold all of the lots. Taxaid com   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. Taxaid com The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. Taxaid com Future improvement costs. Taxaid com   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. Taxaid com See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. Taxaid com Use of erroneous cost basis. Taxaid com   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. Taxaid com Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. Taxaid com Example. Taxaid com You bought a tract of land to which you assigned a cost of $15,000. Taxaid com 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. Taxaid com You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. Taxaid com Several years later you determine that your original basis in the tract was $22,500 and not $15,000. Taxaid com You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. Taxaid com 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). Taxaid com You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. Taxaid com 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. Taxaid com The result of these adjustments to the basis is the adjusted basis. Taxaid com Increases to Basis Increase the basis of any property by all items properly added to a capital account. Taxaid com These include the cost of any improvements having a useful life of more than 1 year. Taxaid com Rehabilitation expenses also increase basis. Taxaid com However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. Taxaid com If you have to recapture any of the credit, increase your basis by the recaptured amount. Taxaid com If you make additions or improvements to business property, keep separate accounts for them. Taxaid com 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. Taxaid com For more information, see Publication 946. Taxaid com The following items increase the basis of property. Taxaid com 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. Taxaid com 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. Taxaid com Do not deduct them as taxes. Taxaid com However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. Taxaid com Example. Taxaid com 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. Taxaid com Add the assessment to your property's basis. Taxaid com In this example, the assessment is a depreciable asset. Taxaid com Deducting vs. Taxaid com Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. Taxaid com For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. Taxaid com However, you can choose either to deduct or to capitalize certain other costs. Taxaid com If you capitalize these costs, include them in your basis. Taxaid com If you deduct them, do not include them in your basis. Taxaid com See Uniform Capitalization Rules earlier. Taxaid com The costs you can choose to deduct or to capitalize include the following. Taxaid com 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. Taxaid com If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Taxaid com For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. Taxaid com Table 1. Taxaid com 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. Taxaid com 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. Taxaid com Some of these items are discussed next. Taxaid com 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. Taxaid com 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. Taxaid com To make this determination, compare the repaired property to the property before the casualty. Taxaid com For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. Taxaid com Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. Taxaid com It reduces the basis of the affected part of the property. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com For more information about the section 179 deduction, see Publication 946. Taxaid com 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. Taxaid com Reduce the basis of the property for which you received the subsidy by the excluded amount. Taxaid com For more information on this subsidy, see Publication 525. Taxaid com 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. Taxaid com 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. Taxaid com If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com For information on figuring depreciation, see Publication 946. Taxaid com If you are claiming depreciation on a business vehicle, see Publication 463. Taxaid com If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. Taxaid com Include the excess depreciation in your gross income and add it to your basis in the property. Taxaid com For information on the computation of excess depreciation, see chapter 4 in Publication 463. Taxaid com 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. Taxaid com A debt includes any indebtedness for which you are liable or which attaches to property you hold. Taxaid com You can exclude canceled debt from income in the following situations. Taxaid com 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). Taxaid com 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. Taxaid com However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. Taxaid com For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. Taxaid com For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. Taxaid com For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. Taxaid com 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. Taxaid com For more information on the rules for the sale of a home, see Publication 523. Taxaid com 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. Taxaid com This also applies to amounts you received under an employer's adoption assistance program and excluded from income. Taxaid com For more information Form 8839, Qualified Adoption Expenses. Taxaid com 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. Taxaid com You must reduce your basis in that property by the credit claimed. Taxaid com For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. Taxaid com Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. Taxaid com You also paid commissions of $2,000 and title search and legal fees of $600. Taxaid com 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. Taxaid com Immediately you spent $20,000 in remodeling the building before you placed it in service. Taxaid com You were allowed depreciation of $14,526 for the years 2005 through 2009. Taxaid com In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. Taxaid com You claimed a deduction for this loss. Taxaid com You spent $5,500 to repair the damages and extend the useful life of the building. Taxaid com 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. Taxaid com It is not affected by any of the above adjustments. Taxaid com Basis Other Than Cost There are many times when you cannot use cost as basis. Taxaid com In these cases, the fair market value or the adjusted basis of property may be used. Taxaid com Adjusted basis is discussed earlier. Taxaid com Fair market value (FMV). Taxaid com   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. Taxaid com Sales of similar property on or about the same date may be helpful in figuring the property's FMV. Taxaid com Property Received for Services If you receive property for services, include the property's FMV in income. Taxaid com The amount you include in income becomes your basis. Taxaid com 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. Taxaid com Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. Taxaid com 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. Taxaid com Your basis in the property is its FMV (your purchase price plus the amount you include in income). Taxaid com If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. Taxaid com However, your basis in the property is still its FMV. Taxaid com See Employee Discounts in Publication 15-B. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. Taxaid com Example. Taxaid com 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. Taxaid com The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. Taxaid com You do not report any income until you have completed the 5 years of service that satisfy the condition. Taxaid com Fair market value. Taxaid com   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. Taxaid com Example. Taxaid com You received stock from your employer for services you performed. Taxaid com If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. Taxaid com At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. Taxaid com This is a restriction that by its terms will never end and you must consider it when you figure the FMV. Taxaid com Election. Taxaid com   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. Taxaid com If you make this choice, the substantially vested rules do not apply. Taxaid com Your basis is the amount you paid plus the amount you included in income. Taxaid com   See the discussion of Restricted Property in Publication 525 for more information. Taxaid com Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Taxaid com A taxable gain or deductible loss is also known as a recognized gain or loss. Taxaid com 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. Taxaid com A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. Taxaid com Example. Taxaid com You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. Taxaid com You must report a taxable gain of $3,000 for the land. Taxaid com The tractor has a basis of $6,000. Taxaid com 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. Taxaid com Similar or related property. Taxaid com   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. Taxaid com However, make the following adjustments. Taxaid com Decrease the basis by the following. Taxaid com Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. Taxaid com Increase the basis by the following. Taxaid com Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. Taxaid com Money or property not similar or related. Taxaid com   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. Taxaid com Example. Taxaid com The state condemned your property. Taxaid com The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. Taxaid com You realized a gain of $5,000 ($31,000 − $26,000). Taxaid com You bought replacement property similar in use to the converted property for $29,000. Taxaid com You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Taxaid com Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Taxaid com 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. Taxaid com   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Taxaid com Example. Taxaid com 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. Taxaid com Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. Taxaid com More information. Taxaid com   For more information about condemnations, see Involuntary Conversions in Publication 544. Taxaid com For more information about casualty and theft losses, see Publication 547. Taxaid com Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Taxaid com If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Taxaid com A nontaxable gain or loss is also known as an unrecognized gain or loss. Taxaid com Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Taxaid com 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. Taxaid com There must also be an exchange of like-kind property. Taxaid com For more information, see Like-Kind Exchanges in Publication 544. Taxaid com The basis of the property you receive is the same as the basis of the property you gave up. Taxaid com Example. Taxaid com You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. Taxaid com Your basis in the new property is the same as the basis of the old ($50,000). Taxaid com Exchange expenses. Taxaid com   Exchange expenses are generally the closing costs you pay. Taxaid com They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. Taxaid com Add them to the basis of the like-kind property received. Taxaid com Property plus cash. Taxaid com   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. Taxaid com Example. Taxaid com You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. Taxaid com Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). Taxaid com Special rules for related persons. Taxaid com   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. Taxaid com Each person must report any gain or loss not recognized on the original exchange. Taxaid com Each person reports it on the tax return filed for the year in which the later disposition occurs. Taxaid com If this rule applies, the basis of the property received in the original exchange will be its fair market value. Taxaid com   These rules generally do not apply to the following kinds of property dispositions. Taxaid com 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. Taxaid com Related persons. Taxaid com   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. Taxaid com   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. Taxaid com ), see Nondeductible Loss in chapter 2 of Publication 544. Taxaid com Exchange of business property. Taxaid com   Exchanging the assets of one business for the assets of another business is a multiple property exchange. Taxaid com For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Taxaid com Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. Taxaid com The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. Taxaid com Decrease the basis by the following amounts. Taxaid com Any money you receive, and Any loss you recognize on the exchange. Taxaid com Increase the basis by the following amounts. Taxaid com Any additional costs you incur, and Any gain you recognize on the exchange. Taxaid com If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Taxaid com Example. Taxaid com You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. Taxaid com You realized a gain of $200 ($6,200 − $6,000). Taxaid com 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). Taxaid com You include all the gain in income (recognized gain) because the gain is less than the cash received. Taxaid com 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. Taxaid com   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Taxaid com The rest is the basis of the like property. Taxaid com Example. Taxaid com You had an adjusted basis of $15,000 in real estate you held for investment. Taxaid com 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. Taxaid com The truck is unlike property. Taxaid com You realized a gain of $1,500 ($16,500 − $15,000). Taxaid com 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). Taxaid com 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. Taxaid com Your basis in the properties you received is figured as follows. Taxaid com 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). Taxaid com This is the truck's FMV. Taxaid com The rest ($12,500) is the basis of the real estate. Taxaid com 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. Taxaid com Example. Taxaid com You are a salesperson and you use one of your cars 100% for business. Taxaid com You have used this car in your sales activities for 2 years and have depreciated it. Taxaid com Your adjusted basis in the car is $22,600 and its FMV is $23,100. Taxaid com You are interested in a new car, which sells for $28,000. Taxaid com 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). Taxaid com 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. Taxaid com 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). Taxaid com Your basis for depreciating the new car is $27,500, the same as if you traded the old car. Taxaid com 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. Taxaid com The first is an exchange of like-kind property. Taxaid com The second is personal-use property on which gain is recognized and loss is not recognized. Taxaid com First, figure your adjusted basis in the property as if you transferred two separate properties. Taxaid com Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. Taxaid com Deduct the depreciation you took or could have taken from the adjusted basis of the business part. Taxaid com Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. Taxaid com The business part of the property is permitted to be exchanged tax free. Taxaid com However, you must recognize any gain from the exchange of the nonbusiness part. Taxaid com You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. Taxaid com 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. Taxaid com 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. Taxaid com For more information, see Publication 523. Taxaid com Trade of car used partly in business. Taxaid com   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. Taxaid com   For information on figuring your basis for depreciation, see Publication 463. Taxaid com 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. Taxaid com However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com For more information on these bonds, see Publication 550. Taxaid com 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. Taxaid com For more information, see Publication 504, Divorced or Separated Individuals. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com 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). Taxaid com 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. Taxaid com Example. Taxaid com You received an acre of land as a gift. Taxaid com At the time of the gift, the land had an FMV of $8,000. Taxaid com The donor's adjusted basis was $10,000. Taxaid com After you received the land, no events occurred to increase or decrease your basis. Taxaid com 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. Taxaid com 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. Taxaid com If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Taxaid com 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. Taxaid com If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. Taxaid com Business property. Taxaid com   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. Taxaid com 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. Taxaid com Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Taxaid com 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. Taxaid com See Adjusted Basis earlier. Taxaid com Gift received before 1977. Taxaid com   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. Taxaid com However, do not increase your basis above the FMV of the gift at the time it was given to you. Taxaid com Example 1. Taxaid com You were given a house in 1976 with an FMV of $21,000. Taxaid com The donor's adjusted basis was $20,000. Taxaid com The donor paid a gift tax of $500. Taxaid com Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. Taxaid com Example 2. Taxaid com If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. Taxaid com 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. Taxaid com Gift received after 1976. Taxaid com   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. Taxaid com Figure the increase by multiplying the gift tax paid by a fraction. Taxaid com The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Taxaid com   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. Taxaid com 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. Taxaid com For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Taxaid com Example. Taxaid com In 2010, you received a gift of property from your mother that had an FMV of $50,000. Taxaid com Her adjusted basis was $20,000. Taxaid com The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). Taxaid com She paid a gift tax of $9,000. Taxaid com 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) . Taxaid com 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. Taxaid com See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Taxaid com 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. Taxaid com The FMV of the property at the date of the individual's death. Taxaid com The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. Taxaid com For information on the alternate valuation date, see the Instructions for Form 706. Taxaid com 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. Taxaid com This method is discussed later. Taxaid com 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. Taxaid com For information on a qualified conservation easement, see the Instructions for Form 706. Taxaid com 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. Taxaid com For more information, see the Instructions for Form 706. Taxaid com Appreciated property. Taxaid com   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. Taxaid com 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. Taxaid com Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com For example, you and your spouse owned community property that had a basis of $80,000. Taxaid com When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Taxaid com The FMV of the community interest was $100,000. Taxaid com The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Taxaid com The basis of the other half to your spouse's heirs is also $50,000. Taxaid com For more information on community property, see Publication 555, Community Property. Taxaid com 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. Taxaid com Example. Taxaid com John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. Taxaid com John furnished two-thirds of the purchase price and Jim furnished one-third. Taxaid com Depreciation deductions allowed before John's death were $12,000. Taxaid com Under local law, each had a half interest in the income from the property. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. Taxaid com It does not matter how much each spouse contributed to the purchase price. Taxaid com Also, it does not matter which spouse dies first. Taxaid com A qualified joint interest is any interest in property held by husband and wife as either of the following. Taxaid com Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. Taxaid com Basis. Taxaid com   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. Taxaid com Decrease the cost by any deductions allowed to you for depreciation and depletion. Taxaid com Increase the reduced cost by your basis in the half you inherited. Taxaid com 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. Taxaid com 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. Taxaid com 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. Taxaid com Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Taxaid com Special-use valuation. Taxaid com   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. Taxaid com Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Taxaid com 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. Taxaid com Figure all FMVs without regard to the special-use valuation. Taxaid com   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Taxaid com 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. Taxaid com   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. Taxaid com 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. Taxaid com The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. Taxaid com   You make the election by filing with Form 706-A a statement that does all of the following. Taxaid com 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. Taxaid com   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. Taxaid com 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. Taxaid com An example of changing property held for personal use to business use would be renting out your former main home. Taxaid com Basis for depreciation. Taxaid com   The basis for depreciation is the lesser of the following amounts. Taxaid com The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Taxaid com Example. Taxaid com Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. Taxaid com 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. Taxaid com Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Taxaid com Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Taxaid com 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. Taxaid com 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). Taxaid com Sale of property. Taxaid com   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. Taxaid com Gain. Taxaid com   The basis for figuring a gain is your adjusted basis when you sell the property. Taxaid com Example. Taxaid com 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. Taxaid com Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Taxaid com Loss. Taxaid com   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. Taxaid com 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. Taxaid com Example. Taxaid com 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. Taxaid com 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. Taxaid com Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). Taxaid com 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. Taxaid com By selecting the method that is best for you, you will have quick and easy access to tax help. Taxaid com Contacting your Taxpayer Advocate. Taxaid com   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. Taxaid com 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. Taxaid com Here are seven things every taxpayer should know about TAS. Taxaid com TAS is your voice at the IRS. Taxaid com Our service is free, confidential, and tailored to meet your needs. Taxaid com 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. Taxaid com We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. Taxaid com This includes businesses as well as individuals. Taxaid com Our employees know the IRS and how to navigate it. Taxaid com 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. Taxaid com We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. Taxaid com 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. Taxaid com irs. Taxaid com gov/advocate. Taxaid com You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. Taxaid com You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. Taxaid com taxtoolkit. Taxaid com irs. Taxaid com gov. Taxaid com You can get updates on hot tax topics by visiting our YouTube channel at www. Taxaid com youtube. Taxaid com com/tasnta and our Facebook page at www. Taxaid com facebook. Taxaid com com/YourVoiceAtIRS, or by following our tweets at www. Taxaid com twitter. Taxaid com com/YourVoiceAtIRS. Taxaid com Low Income Taxpayer Clinics (LITCs). Taxaid com   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. Taxaid com LITCs are independent from the IRS. Taxaid com 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. Taxaid com If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. Taxaid com For more information, see Publication 4134, Low Income Taxpayer Clinic List. Taxaid com This publication is available at IRS. Taxaid com gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. Taxaid com Free tax services. Taxaid com   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Taxaid com Learn about free tax information from the IRS, including publications, services, and education and assistance programs. Taxaid com The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. Taxaid com The majority of the information and services listed in this publication are available to you free of charge. Taxaid com If there is a fee associated with a resource or service, it is listed in the publication. Taxaid com   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d
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IRS Letters and Visits to Return Preparers

The Internal Revenue Service sends many letters annually to federal tax return preparers. Beginning in November 2013, the agency began its fifth year of a hands-on effort to improve the accuracy and quality of filed tax returns and to heighten awareness of preparer responsibilities. Approximately 12,000 letters will be sent to tax return preparers nationwide. Types of letters sent include:

Letter 4810 - Sent in November 2013 advising the recipient that an IRS representative will contact them to schedule an educational visit to review their responsibilities in correctly preparing the Schedule C.

Letter 5105 - Sent in December 2013 recommending the recipient review all Schedule C and preparer due diligence rules, as well as pay special attention to Schedule C accuracy in 2014.

Letter 5271 - Sent in December 2013 recommending the recipient review all Additional Child Tax Credit (ACTC) and preparer due diligence rules, as well as pay special attention to ACTC accuracy in 2014.

Letter 5272 - Sent in December 2013 recommending the recipient review all Additional Child Tax Credit (ACTC) and preparer due diligence rules, as well as pay special attention to ACTC accuracy in 2014 on returns where dependents have an Individual Tax Identification Number (ITIN).

Letter 5292 - Sent in November 2013 advising the recipient that an IRS representative will contact them to schedule an educational visit to review their responsibilities in correctly following preparer tax identification number (PTIN) rules.

The IRS also regularly checks whether federal tax return preparers are compliant with their own tax filing and payment responsibilities.

Letter 4911 - Sent to notify paid tax return preparers that they are not compliant with their personal tax responsibilities and should resolve the matter to avoid affecting their status as a preparer tax identification number (PTIN) holder.

IRS Letters and Visits to Return Preparers: FAQs

 

 

Page Last Reviewed or Updated: 19-Dec-2013

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Taxaid com 8. Taxaid com   Foreign Insurance Taxes Table of Contents Premium. Taxaid com Tax is imposed on insurance policies issued by foreign insurers. Taxaid com Any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit they are made, signed, issued, or sold, is liable for the tax. Taxaid com The following tax rates apply to each dollar (or fraction thereof) of the premium paid. Taxaid com Casualty insurance and indemnity, fidelity, and surety bonds: 4 cents. Taxaid com For example, on a premium payment of $10. Taxaid com 10, the tax is 44 cents. Taxaid com Life, sickness, and accident insurance, and annuity contracts: 1 cent. Taxaid com For example, on a premium payment of $10. Taxaid com 10, the tax is 11 cents. Taxaid com Reinsurance policies covering any of the taxable contracts described in items (1) and (2): 1 cent. Taxaid com However, the tax does not apply to casualty insurance premiums paid to foreign insurers for coverage of export goods in transit to foreign destinations. Taxaid com Premium. Taxaid com   Premium means the agreed price or consideration for assuming and carrying the risk or obligation. Taxaid com It includes any additional charge or assessment payable under the contract, whether in one sum or installments. Taxaid com If premiums are refunded, claim the tax paid on those premiums as an overpayment against tax due on other premiums paid or file a claim for refund. Taxaid com When liability attaches. Taxaid com   The liability for this tax attaches when the premium payment is transferred to the foreign insurer or reinsurer (including transfers to any bank, trust fund, or similar recipient designated by the foreign insurer or reinsurer) or to any nonresident agent, solicitor, or broker. Taxaid com A person can pay the tax before the liability attaches if the person keeps records consistent with that practice. Taxaid com Who must file. Taxaid com   The person who pays the premium to the foreign insurer (or to any nonresident person such as a foreign broker) must pay the tax and file the return. Taxaid com Otherwise, any person who issued or sold the policy, or who is insured under the policy, is required to pay the tax and file the return. Taxaid com    The person liable for this tax must keep accurate records that identify each policy or instrument subject to tax. Taxaid com These records must clearly establish the type of policy or instrument, the gross premium paid, the identity of the insured and insurer, and the total premium charged. Taxaid com If the premium is to be paid in installments, the records must also establish the amount and anniversary date of each installment. Taxaid com   The records must be kept at the place of business or other convenient location for at least 3 years after the later of the date any part of the tax became due, or the date any part of the tax was paid. Taxaid com During this period, the records must be readily accessible to the IRS. Taxaid com   The person having control or possession of a policy or instrument subject to this tax must keep the policy for at least 3 years after the date any part of the tax on it was paid. Taxaid com For information on reinsurance premiums paid from one foreign insurer to another foreign insurer, see Rev. Taxaid com Rul. Taxaid com 2008-15. Taxaid com You can find Rev. Taxaid com Rul. Taxaid com 2008-15 on page 633 of I. Taxaid com R. Taxaid com B. Taxaid com 2008-12 at www. Taxaid com irs. Taxaid com gov/pub/irs-irbs/irb08-12. Taxaid com pdf. Taxaid com Treaty-based positions under IRC 6114. Taxaid com   You may have to file an annual report disclosing the amount of premiums exempt from United States excise tax as a result of the application of a treaty with the United States that overrides (or otherwise modifies) any provision of the Internal Revenue Code. Taxaid com   Attach any disclosure statement to the first quarter Form 720. Taxaid com You may be able to use Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), as a disclosure statement. Taxaid com See the Instructions for Form 720 for information on how and where to file. Taxaid com   See Revenue Procedure 92-14 in Cumulative Bulletin 1992-1 for procedures you can use to claim a refund of this tax under certain U. Taxaid com S. Taxaid com treaties. Taxaid com Prev  Up  Next   Home   More Online Publications