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1040x efile 9. 1040x efile   Tax Treaty Benefits Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Treaty Income Some Typical Tax Treaty BenefitsPersonal Services Teachers, Professors, and Researchers Employees of Foreign Governments Students, Apprentices, and Trainees Capital Gains Resident Aliens Reporting Treaty Benefits Claimed Introduction A nonresident alien (and certain resident aliens) from a country with which the United States has an income tax treaty may qualify for certain benefits. 1040x efile Most treaties require that the nonresident alien be a resident of the treaty country to qualify. 1040x efile However, some treaties require that the nonresident alien be a national or a citizen of the treaty country. 1040x efile See Table 9-1 for a list of tax treaty countries. 1040x efile You can generally arrange to have withholding tax reduced or eliminated on wages and other income that are eligible for tax treaty benefits. 1040x efile See Income Entitled to Tax Treaty Benefits in chapter 8. 1040x efile Topics - This chapter discusses: Typical tax treaty benefits, How to obtain copies of tax treaties, and How to claim tax treaty benefits on your tax return. 1040x efile Useful Items - You may want to see: Publication 901 U. 1040x efile S. 1040x efile Tax Treaties Form (and Instructions) 1040NR U. 1040x efile S. 1040x efile Nonresident Alien Income Tax Return 1040NR-EZ U. 1040x efile S. 1040x efile Income Tax Return for Certain Nonresident Aliens With No Dependents 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) See chapter 12 for information about getting these publications and forms. 1040x efile Treaty Income A nonresident alien's treaty income is the gross income on which the tax is limited by a tax treaty. 1040x efile Treaty income includes, for example, dividends from sources in the United States that are subject to tax at a tax treaty rate not to exceed 15%. 1040x efile Nontreaty income is the gross income of a nonresident alien on which the tax is not limited by a tax treaty. 1040x efile Figure the tax on treaty income on each separate item of income at the reduced rate that applies to that item under the treaty. 1040x efile To determine tax on nontreaty income, figure the tax at either the flat 30% rate or the graduated rate, depending upon whether or not the income is effectively connected with your trade or business in the United States. 1040x efile Your tax liability is the sum of the tax on treaty income plus the tax on nontreaty income, but cannot be more than the tax liability figured as if the tax treaty had not come into effect. 1040x efile Example. 1040x efile Arthur Banks is a nonresident alien who is single and a resident of a foreign country that has a tax treaty with the United States. 1040x efile He received gross income of $25,850 during the tax year from sources within the United States, consisting of the following items: Dividends on which the tax is limited to a 15% rate by the tax treaty $1,400 Compensation for personal services on which the tax is not limited by the tax treaty 24,450 Total gross income $25,850 Arthur was engaged in business in the United States during the tax year. 1040x efile His dividends are not effectively connected with that business. 1040x efile He has no deductions other than his own personal exemption. 1040x efile His tax liability, figured as though the tax treaty had not come into effect, is $3,060 determined as follows: Total compensation $24,450 Less: Personal exemption 3,900 Taxable income $20,550 Tax determined by graduated rate (Tax Table column for single taxpayers) $2,640 Plus: Tax on gross dividends ($1,400 × 30%) 420 Tax determined as though treaty had not come into effect $3,060 Arthur's tax liability, figured by taking into account the reduced rate on dividend income as provided by the tax treaty, is $2,850 determined as follows: Tax determined by graduated rate (same as figured above) $2,640 Plus: Tax on gross dividends ($1,400 × 15%) 210 Tax on compensation and dividends $2,850 His tax liability, therefore, is limited to $2,850, the tax liability figured using the tax treaty rate on the dividends. 1040x efile Some Typical Tax Treaty Benefits The following paragraphs briefly explain the exemptions that are available under tax treaties for personal services income, remittances, scholarships, fellowships, and capital gain income. 1040x efile The conditions for claiming the exemptions vary under each tax treaty. 1040x efile For more information about the conditions under a particular tax treaty, see Publication 901. 1040x efile Or, you may download the complete text of most U. 1040x efile S. 1040x efile tax treaties at IRS. 1040x efile gov. 1040x efile Technical explanations for many of those treaties are also available at that site. 1040x efile Tax treaty benefits also cover income such as dividends, interest, rentals, royalties, pensions, and annuities. 1040x efile These types of income may be exempt from U. 1040x efile S. 1040x efile tax or may be subject to a reduced rate of tax. 1040x efile For more information, see Publication 901 or the applicable tax treaty. 1040x efile Personal Services Nonresident aliens from treaty countries who are in the United States for a short stay and also meet certain other requirements may be exempt from tax on their compensation received for personal services performed in the United States. 1040x efile Many tax treaties require that the nonresident alien claiming this exemption be present in the United States for a total of not more than 183 days during the tax year. 1040x efile Other tax treaties specify different periods of maximum presence in the United States, such as 180 days or 90 days. 1040x efile Spending part of a day in the United States counts as a day of presence. 1040x efile Tax treaties may also require that: The compensation cannot be more than a specific amount (frequently $3,000), and The individual have a foreign employer; that is, an individual, corporation, or entity of a foreign country. 1040x efile Note. 1040x efile Under most treaties, income received as an employee (generally designated as dependent personal services) and income received as a self-employed person (generally designated as independent personal services or business income) are treated differently. 1040x efile Teachers, Professors, and Researchers Under many income tax treaties, nonresident alien teachers or professors who temporarily visit the United States for the primary purpose of teaching at a university or other accredited educational institution are not subject to U. 1040x efile S. 1040x efile income tax on compensation received for teaching for the first 2 or 3 years after their arrival in the United States. 1040x efile Many treaties also provide an exemption for engaging in research. 1040x efile Generally, the teacher or professor must be in the United States primarily to teach, lecture, instruct, or engage in research. 1040x efile A substantial part of that person's time must be devoted to those duties. 1040x efile The normal duties of a teacher or professor include not only formal classroom work involving regularly scheduled lectures, demonstrations, or other student-participation activities, but also the less formal method of presenting ideas in seminars or other informal groups and in joint efforts in the laboratory. 1040x efile If you entered the United States as a nonresident alien, but are now a resident alien, the treaty exemption may still apply. 1040x efile See Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens later under Resident Aliens. 1040x efile Employees of Foreign Governments All treaties have provisions for the exemption of income earned by certain employees of foreign governments. 1040x efile However, a difference exists among treaties as to who qualifies for this benefit. 1040x efile Under many treaties, aliens admitted to the United States for permanent residence do not qualify. 1040x efile Under most treaties, aliens who are not nationals or subjects of the foreign country do not qualify. 1040x efile Employees of foreign governments should read the pertinent treaty carefully to determine whether they qualify for benefits. 1040x efile Chapter 10 of this publication also has information for employees of foreign governments. 1040x efile Students, Apprentices, and Trainees Under some income tax treaties, students, apprentices, and trainees are exempt from tax on remittances received from abroad for study and maintenance. 1040x efile Also, under some treaties, scholarship and fellowship grants, and a limited amount of compensation received by students, apprentices, and trainees may be exempt from tax. 1040x efile If you entered the United States as a nonresident alien, but are now a resident alien, the treaty exemption may still apply. 1040x efile See Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens , later, under Resident Aliens. 1040x efile Capital Gains Most treaties provide for the exemption of gains from the sale or exchange of personal property. 1040x efile Generally, gains from the sale or exchange of real property located in the United States are taxable. 1040x efile Resident Aliens Resident aliens may qualify for tax treaty benefits in the situations discussed below. 1040x efile U. 1040x efile S. 1040x efile Residency Under Tax Treaty “Tie-Breaker” Rule In certain circumstances, individuals who are treated as residents of the United States under an income tax treaty (after application of the so-called “tie-breaker” rule) will be entitled to treaty benefits. 1040x efile (The “tie-breaker” rule is explained in chapter 1 under Effect of Tax Treaties. 1040x efile ) If this applies to you, you generally will not need to file a Form 8833 for the income for which treaty benefits are claimed. 1040x efile This is because the income will typically be of a category for which disclosure on a Form 8833 is waived. 1040x efile See Reporting Treaty Benefits Claimed . 1040x efile In most cases, you also will not need to report the income on your Form 1040 because the income will be exempt from U. 1040x efile S. 1040x efile tax under the treaty. 1040x efile However, if the income has been reported as taxable income on a Form W-2, Form 1042-S, Form 1099, or other information return, you should report it on the appropriate line of Form 1040 (for example, line 7 in the case of wages or salaries). 1040x efile Enter the amount for which treaty benefits are claimed in parentheses on Form 1040, line 21. 1040x efile Next to the amount write “Exempt income,” the name of the treaty country, and the treaty article that provides the exemption. 1040x efile On Form 1040, subtract this amount from your income to arrive at total income on Form 1040, line 22. 1040x efile Also follow the above procedure for income that is subject to a reduced rate of tax, instead of an exemption, under the treaty. 1040x efile Attach a statement to Form 1040 showing a computation of the tax at the reduced rate, the name of the treaty country, and the treaty article that provides for the reduced tax rate. 1040x efile Include this tax on Form 1040, line 61. 1040x efile On the dotted line next to line 61, write “Tax from attached statement” and the amount of the tax. 1040x efile Example. 1040x efile Jacques Dubois, who is a resident of the United States under Article 4 of the U. 1040x efile S. 1040x efile -France income tax treaty, receives French social security benefits. 1040x efile Under Article 18(1) of the treaty, French social security benefits are not taxable by the United States. 1040x efile Mr. 1040x efile Dubois is not required to file a Form 8833 for his French social security benefits or report the benefits on Form 1040. 1040x efile Special Rule for Canadian and German Social Security Benefits Under income tax treaties with Canada and Germany, if a U. 1040x efile S. 1040x efile resident receives social security benefits from Canada or Germany, those benefits are treated for U. 1040x efile S. 1040x efile income tax purposes as if they were received under the social security legislation of the United States. 1040x efile If you receive social security benefits from Canada or Germany, include them on line 1 of your Social Security Benefits Worksheet for purposes of determining the taxable amount to be reported on Form 1040, line 20b or Form 1040A, line 14b. 1040x efile You are not required to file a Form 8833 for those benefits. 1040x efile Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens Generally, you must be a nonresident alien student, apprentice, trainee, teacher, professor, or researcher in order to claim a tax treaty exemption for remittances from abroad for study and maintenance in the United States, for scholarship, fellowship, and research grants, and for wages or other personal service compensation. 1040x efile Once you become a resident alien, you generally can no longer claim a tax treaty exemption for this income. 1040x efile However, if you entered the United States as a nonresident alien, but you are now a resident alien for U. 1040x efile S. 1040x efile tax purposes, the treaty exemption will continue to apply if the tax treaty's saving clause (explained later) provides an exception for it and you otherwise meet the requirements for the treaty exemption (including any time limit, explained later). 1040x efile This is true even if you are a nonresident alien electing to file a joint return as explained in chapter 1. 1040x efile Some exceptions to the saving clause apply to all resident aliens (for example, under the U. 1040x efile S. 1040x efile -People's Republic of China treaty); others apply only to resident aliens who are not lawful permanent residents of the United States (green card holders). 1040x efile If you qualify under an exception to the treaty's saving clause, you can avoid income tax withholding by giving the payor a Form W-9 with the statement required by the Form W-9 instructions. 1040x efile Saving clause. 1040x efile   Most tax treaties have a saving clause. 1040x efile A saving clause preserves or “saves” the right of each country to tax its own residents as if no tax treaty were in effect. 1040x efile Thus, once you become a resident alien of the United States, you generally lose any tax treaty benefits that relate to your income. 1040x efile However, many tax treaties have exceptions to the saving clause, which may allow you to continue to claim certain treaty benefits when you become a resident alien. 1040x efile Read the treaty to find out if it has a saving clause and an exception to it. 1040x efile Time limit for claiming treaty exemptions. 1040x efile   Many treaties limit the number of years you can claim a treaty exemption. 1040x efile For students, apprentices, and trainees, the limit is usually 4–5 years; for teachers, professors, and researchers, the limit is usually 2–3 years. 1040x efile Once you reach this limit, you can no longer claim the treaty exemption. 1040x efile See the treaty or Publication 901 for the time limits that apply. 1040x efile How to report income on your tax return. 1040x efile   In most cases, you also will not need to report the income on your Form 1040 because the income will be exempt from U. 1040x efile S. 1040x efile tax under the treaty. 1040x efile However, if the income has been reported as taxable income on a Form W-2, Form 1042-S, Form 1099, or other information return, you should report it on the appropriate line of Form 1040 (for example, line 7 in the case of wages, salaries, scholarships, or fellowships). 1040x efile Enter the amount for which treaty benefits are claimed in parentheses on Form 1040, line 21. 1040x efile Next to the amount write “Exempt income,” the name of the treaty country, and the treaty article that provides the exemption. 1040x efile On Form 1040, subtract this amount from your income to arrive at total income on Form 1040, line 22. 1040x efile Example. 1040x efile Mr. 1040x efile Yu, a citizen of the People's Republic of China, entered the United States as a nonresident alien student on January 1, 2009. 1040x efile He remained a nonresident alien through 2013 and was able to exclude his scholarship from U. 1040x efile S. 1040x efile tax in those years under Article 20 of the U. 1040x efile S. 1040x efile -People's Republic of China income tax treaty. 1040x efile On January 1, 2014, he became a resident alien under the substantial presence test because his stay in the United States exceeded 5 years. 1040x efile Even though Mr. 1040x efile Yu is now a resident alien, the provisions of Article 20 still apply because of the exception to the saving clause in paragraph 2 of the Protocol to the U. 1040x efile S. 1040x efile -People's Republic of China treaty dated April 30, 1984. 1040x efile Mr. 1040x efile Yu should submit Form W-9 and the required statement to the payor. 1040x efile Reporting Treaty Benefits Claimed If you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits your tax is, or might be, reduced, you must attach a fully completed Form 8833 to your tax return. 1040x efile See below, for the situations where you are not required to file Form 8833. 1040x efile You must file a U. 1040x efile S. 1040x efile tax return and Form 8833 if you claim the following treaty benefits. 1040x efile You claim a reduction or modification in the taxation of gain or loss from the disposition of a U. 1040x efile S. 1040x efile real property interest based on a treaty. 1040x efile You claim a credit for a specific foreign tax for which foreign tax credit would not be allowed by the Internal Revenue Code. 1040x efile You receive payments or income items totaling more than $100,000 and you determine your country of residence under a treaty and not under the rules for residency discussed in chapter 1. 1040x efile These are the more common situations for which Form 8833 is required. 1040x efile Exceptions. 1040x efile   You do not have to file Form 8833 for any of the following situations. 1040x efile You claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable annual or periodic income ordinarily subject to the 30% rate. 1040x efile You claim a treaty reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees, or teachers. 1040x efile This includes taxable scholarship and fellowship grants. 1040x efile You claim a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic or Consular Agreement. 1040x efile You are a partner in a partnership or a beneficiary of an estate or trust and the partnership, estate, or trust reports the required information on its return. 1040x efile The payments or items of income that are otherwise required to be disclosed total no more than $10,000. 1040x efile You are claiming treaty benefits for amounts that are: Reported to you on Form 1042-S and Received by you: As a related party from a reporting corporation within the meaning of Internal Revenue Code section 6038A (relating to information returns on Form 5472 filed by U. 1040x efile S. 1040x efile corporations that are 25-percent owned by a foreign person), or As a beneficial owner that is a direct account holder of a U. 1040x efile S. 1040x efile financial institution or qualified intermediary, or a direct partner, beneficiary, or owner of a withholding foreign partnership or trust, from that U. 1040x efile S. 1040x efile financial institution, qualified intermediary, or withholding foreign partnership or trust. 1040x efile The exception described in (6) above does not apply to any amounts for which a treaty-based return disclosure is specifically required by the Form 8833 instructions. 1040x efile Penalty for failure to provide required information on Form 8833. 1040x efile   If you are required to report the treaty benefits but do not, you may be subject to a penalty of $1,000 for each failure. 1040x efile Additional information. 1040x efile   For additional information, see section 301. 1040x efile 6114-1(c) of the Income Tax Regulations. 1040x efile Table 9-1. 1040x efile Table of Tax Treaties (Updated through December 31, 2013) Country Official Text  Symbol1 General  Effective Date Citation Applicable Treasury Explanations  or Treasury Decision (T. 1040x efile D. 1040x efile ) Australia TIAS 10773 Dec. 1040x efile 1, 1983 1986-2 C. 1040x efile B. 1040x efile 220 1986-2 C. 1040x efile B. 1040x efile 246 Protocol TIAS Jan. 1040x efile 1, 2004     Austria TIAS Jan. 1040x efile 1, 1999     Bangladesh TIAS Jan. 1040x efile 1, 2007     Barbados TIAS 11090 Jan. 1040x efile 1, 1984 1991-2 C. 1040x efile B. 1040x efile 436 1991-2 C. 1040x efile B. 1040x efile 466 Protocol TIAS Jan. 1040x efile 1, 1994     Protocol TIAS Jan. 1040x efile 1, 2005     Belgium TIAS Jan. 1040x efile 1, 2008     Bulgaria TIAS Jan. 1040x efile 1, 2009     Canada2 TIAS 11087 Jan. 1040x efile 1, 1985 1986-2 C. 1040x efile B. 1040x efile 258 1987-2 C. 1040x efile B. 1040x efile 298 Protocol TIAS Jan. 1040x efile 1, 1996     Protocol TIAS Dec. 1040x efile 16, 1997     Protocol TIAS Jan. 1040x efile 1, 2009     China, People's Republic of TIAS 12065 Jan. 1040x efile 1, 1987 1988-1 C. 1040x efile B. 1040x efile 414 1988-1 C. 1040x efile B. 1040x efile 447 Commonwealth of Independent States3 TIAS 8225 Jan. 1040x efile 1, 1976 1976-2 C. 1040x efile B. 1040x efile 463 1976-2 C. 1040x efile B. 1040x efile 475 Cyprus TIAS 10965 Jan. 1040x efile 1, 1986 1989-2 C. 1040x efile B. 1040x efile 280 1989-2 C. 1040x efile B. 1040x efile 314 Czech Republic TIAS Jan. 1040x efile 1, 1993     Denmark TIAS Jan. 1040x efile 1, 2001     Protocol TIAS Jan. 1040x efile 1, 2008     Egypt TIAS 10149 Jan. 1040x efile 1, 1982 1982-1 C. 1040x efile B. 1040x efile 219 1982-1 C. 1040x efile B. 1040x efile 243 Estonia TIAS Jan. 1040x efile 1, 2000     Finland TIAS 12101 Jan. 1040x efile 1, 1991     Protocol TIAS Jan. 1040x efile 1, 2008     France TIAS Jan. 1040x efile 1, 1996     Protocol TIAS Jan. 1040x efile 1, 2007     Protocol TIAS Jan. 1040x efile 1, 2010     Germany TIAS Jan. 1040x efile 1, 1990     Protocol TIAS Jan. 1040x efile 1, 2008     Greece TIAS 2902 Jan. 1040x efile 1, 1953 1958-2 C. 1040x efile B. 1040x efile 1054 T. 1040x efile D. 1040x efile 6109, 1954-2 C. 1040x efile B. 1040x efile 638 Hungary TIAS 9560 Jan. 1040x efile 1, 1980 1980-1 C. 1040x efile B. 1040x efile 333 1980-1 C. 1040x efile B. 1040x efile 354 Iceland TIAS Jan. 1040x efile 1, 2009     India TIAS Jan. 1040x efile 1, 1991     Indonesia TIAS 11593 Jan. 1040x efile 1, 1990     Ireland TIAS Jan. 1040x efile 1, 1998     Israel TIAS Jan. 1040x efile 1, 1995     Italy TIAS Jan. 1040x efile 1, 2010     Jamaica TIAS 10207 Jan. 1040x efile 1, 1982 1982-1 C. 1040x efile B. 1040x efile 257 1982-1 C. 1040x efile B. 1040x efile 291 Japan TIAS Jan. 1040x efile 1, 2005     Kazakhstan TIAS Jan. 1040x efile 1, 1996     Korea, South TIAS 9506 Jan. 1040x efile 1, 1980 1979-2 C. 1040x efile B. 1040x efile 435 1979-2 C. 1040x efile B. 1040x efile 458 Latvia TIAS Jan. 1040x efile 1, 2000     Lithuania TIAS Jan. 1040x efile 1, 2000     Luxembourg TIAS Jan. 1040x efile 1, 2001     Malta TIAS Jan. 1040x efile 1, 2011     Mexico TIAS Jan. 1040x efile 1, 1994 1994-2 C. 1040x efile B. 1040x efile 424 1994-2 C. 1040x efile B. 1040x efile 489 Protocol TIAS Oct. 1040x efile 26, 1995     Protocol TIAS Jan. 1040x efile 1, 2004     Morocco TIAS 10195 Jan. 1040x efile 1, 1981 1982-2 C. 1040x efile B. 1040x efile 405 1982-2 C. 1040x efile B. 1040x efile 427 Netherlands TIAS Jan. 1040x efile 1, 1994     Protocol TIAS Jan. 1040x efile 1, 2005     New Zealand TIAS 10772 Nov. 1040x efile 2, 1983 1990-2 C. 1040x efile B. 1040x efile 274 1990-2 C. 1040x efile B. 1040x efile 303 Protocol TIAS Jan. 1040x efile 1, 2011     Norway TIAS 7474 Jan. 1040x efile 1, 1971 1973-1 C. 1040x efile B. 1040x efile 669 1973-1 C. 1040x efile B. 1040x efile 693 Protocol TIAS 10205 Jan. 1040x efile 1, 1982 1982-2 C. 1040x efile B. 1040x efile 440 1982-2 C. 1040x efile B. 1040x efile 454 Pakistan TIAS 4232 Jan. 1040x efile 1, 1959 1960-2 C. 1040x efile B. 1040x efile 646 T. 1040x efile D. 1040x efile 6431, 1960-1 C. 1040x efile B. 1040x efile 755 Philippines TIAS 10417 Jan. 1040x efile 1, 1983 1984-2 C. 1040x efile B. 1040x efile 384 1984-2 C. 1040x efile B. 1040x efile 412 Poland TIAS 8486 Jan. 1040x efile 1, 1974 1977-1 C. 1040x efile B. 1040x efile 416 1977-1 C. 1040x efile B. 1040x efile 427 Portugal TIAS Jan. 1040x efile 1, 1996     Romania TIAS 8228 Jan. 1040x efile 1, 1974 1976-2 C. 1040x efile B. 1040x efile 492 1976-2 C. 1040x efile B. 1040x efile 504 Russia TIAS Jan. 1040x efile 1, 1994     Slovak Republic TIAS Jan. 1040x efile 1, 1993     Slovenia TIAS Jan. 1040x efile 1, 2002     South Africa TIAS Jan. 1040x efile 1, 1998     Spain TIAS Jan. 1040x efile 1, 1991     Sri Lanka TIAS Jan. 1040x efile 1, 2004     Sweden TIAS Jan. 1040x efile 1, 1996     Protocol TIAS Jan. 1040x efile 1, 2007     Switzerland TIAS Jan. 1040x efile 1, 1998     Thailand TIAS Jan. 1040x efile 1, 1998     Trinidad and Tobago TIAS 7047 Jan. 1040x efile 1, 1970 1971-2 C. 1040x efile B. 1040x efile 479   Tunisia TIAS Jan. 1040x efile 1, 1990     Turkey TIAS Jan. 1040x efile 1, 1998     Ukraine TIAS Jan. 1040x efile 1, 2001     United Kingdom TIAS Jan. 1040x efile 1, 2004     Venezuela TIAS Jan. 1040x efile 1, 2000     1(TIAS) Treaties and Other International Act Series 2Information on the treaty can be found in Publication 597, Information on the United States-Canada Income Tax Treaty. 1040x efile 3The U. 1040x efile S. 1040x efile -U. 1040x efile S. 1040x efile S. 1040x efile R. 1040x efile income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. 1040x efile Prev  Up  Next   Home   More Online Publications
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1040x efile Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 1040x efile Cost Basis The basis of property you buy is usually its cost. 1040x efile The cost is the amount you pay in cash, debt obligations, other property, or services. 1040x efile Your cost also includes amounts you pay for the following items. 1040x efile Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if assumed for the seller). 1040x efile  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. 1040x efile Loans with low or no interest. 1040x efile   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. 1040x efile You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040x efile For more information, see Unstated Interest and Original Issue Discount in Publication 537. 1040x efile Purchase of a business. 1040x efile   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. 1040x efile Allocate the price among the various assets, including any section 197 intangibles. 1040x efile See Allocating the Basis, later. 1040x efile Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. 1040x efile If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. 1040x efile You must adjust the basis of stocks for certain events that occur after purchase. 1040x efile See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. 1040x efile Identifying stock or bonds sold. 1040x efile   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. 1040x efile If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 1040x efile For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 1040x efile Mutual fund shares. 1040x efile   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. 1040x efile For more information, see Publication 550. 1040x efile Real Property Real property, also called real estate, is land and generally anything built on or attached to it. 1040x efile If you buy real property, certain fees and other expenses become part of your cost basis in the property. 1040x efile Real estate taxes. 1040x efile   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 1040x efile You cannot deduct them as taxes. 1040x efile   If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. 1040x efile Do not include that amount in the basis of the property. 1040x efile If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 1040x efile Settlement costs. 1040x efile   Your basis includes the settlement fees and closing costs for buying property. 1040x efile You cannot include in your basis the fees and costs for getting a loan on property. 1040x efile A fee for buying property is a cost that must be paid even if you bought the property for cash. 1040x efile   The following items are some of the settlement fees or closing costs you can include in the basis of your property. 1040x efile Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 1040x efile   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040x efile   The following items are some settlement fees and closing costs you cannot include in the basis of the property. 1040x efile Casualty insurance premiums. 1040x efile Rent for occupancy of the property before closing. 1040x efile Charges for utilities or other services related to occupancy of the property before closing. 1040x efile Charges connected with getting a loan. 1040x efile The following are examples of these charges. 1040x efile Points (discount points, loan origination fees). 1040x efile Mortgage insurance premiums. 1040x efile Loan assumption fees. 1040x efile Cost of a credit report. 1040x efile Fees for an appraisal required by a lender. 1040x efile Fees for refinancing a mortgage. 1040x efile If these costs relate to business property, items (1) through (3) are deductible as business expenses. 1040x efile Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. 1040x efile Points. 1040x efile   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. 1040x efile Generally, you deduct the points over the term of the loan. 1040x efile For more information on how to deduct points, see Points in chapter 4 of Publication 535. 1040x efile Points on home mortgage. 1040x efile   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. 1040x efile If certain requirements are met, you can deduct the points in full for the year in which they are paid. 1040x efile Reduce the basis of your home by any seller-paid points. 1040x efile For more information, see Points in Publication 936, Home Mortgage Interest Deduction. 1040x efile Assumption of mortgage. 1040x efile   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. 1040x efile Example. 1040x efile If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. 1040x efile Constructing assets. 1040x efile   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040x efile Some of these expenses include the following costs. 1040x efile Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 1040x efile In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. 1040x efile You must include them in the asset's basis. 1040x efile Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. 1040x efile    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 1040x efile Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. 1040x efile If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. 1040x efile In certain circumstances, you may be subject to the uniform capitalization rules, next. 1040x efile Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. 1040x efile Activities subject to the rules. 1040x efile   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. 1040x efile Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. 1040x efile However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. 1040x efile   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. 1040x efile Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. 1040x efile Tangible personal property includes films, sound recordings, video tapes, books, or similar property. 1040x efile    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. 1040x efile To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. 1040x efile You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040x efile   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. 1040x efile Example. 1040x efile If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. 1040x efile The nondeductible part of the cost is not subject to the uniform capitalization rules. 1040x efile More information. 1040x efile   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. 1040x efile Exceptions. 1040x efile   The following are not subject to the uniform capitalization rules. 1040x efile Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. 1040x efile For other exceptions to the uniform capitalization rules, see section 1. 1040x efile 263A-1(b) of the regulations. 1040x efile   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. 1040x efile Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. 1040x efile The basis of an intangible asset is usually the cost to buy or create it. 1040x efile If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. 1040x efile The basis of certain intangibles can be amortized. 1040x efile See chapter 8 of Publication 535 for information on the amortization of these costs. 1040x efile Patents. 1040x efile   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. 1040x efile If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. 1040x efile The value of the inventor's time spent on an invention is not part of the basis. 1040x efile Copyrights. 1040x efile   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. 1040x efile Do not include the value of your time as the author, or any other person's time you did not pay for. 1040x efile Franchises, trademarks, and trade names. 1040x efile   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. 1040x efile Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. 1040x efile You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040x efile See Trade or Business Acquired below. 1040x efile Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. 1040x efile If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 1040x efile However, see Trade or Business Acquired, next. 1040x efile Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. 1040x efile Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. 1040x efile Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. 1040x efile Certificates of deposit, U. 1040x efile S. 1040x efile Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040x efile Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. 1040x efile Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. 1040x efile All other assets except section 197 intangibles, goodwill, and going concern value. 1040x efile Section 197 intangibles except goodwill and going concern value. 1040x efile Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 1040x efile Agreement. 1040x efile   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. 1040x efile This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040x efile Reporting requirement. 1040x efile   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 1040x efile Use Form 8594 to provide this information. 1040x efile The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040x efile More information. 1040x efile   See Sale of a Business in chapter 2 of Publication 544 for more information. 1040x efile Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. 1040x efile Figure the basis of each asset by multiplying the lump sum by a fraction. 1040x efile The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040x efile If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. 1040x efile Demolition of building. 1040x efile   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. 1040x efile Do not claim the costs as a current deduction. 1040x efile Modification of building. 1040x efile   A modification of a building will not be treated as a demolition if the following conditions are satisfied. 1040x efile 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. 1040x efile   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. 1040x efile   If these conditions are met, add the costs of the modifications to the basis of the building. 1040x efile Subdivided lots. 1040x efile   If you buy a tract of land and subdivide it, you must determine the basis of each lot. 1040x efile This is necessary because you must figure the gain or loss on the sale of each individual lot. 1040x efile As a result, you do not recover your entire cost in the tract until you have sold all of the lots. 1040x efile   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. 1040x efile The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. 1040x efile Future improvement costs. 1040x efile   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. 1040x efile See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. 1040x efile Use of erroneous cost basis. 1040x efile   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. 1040x efile Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. 1040x efile Example. 1040x efile You bought a tract of land to which you assigned a cost of $15,000. 1040x efile You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. 1040x efile You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. 1040x efile Several years later you determine that your original basis in the tract was $22,500 and not $15,000. 1040x efile You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. 1040x efile You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). 1040x efile You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. 1040x efile Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. 1040x efile The result of these adjustments to the basis is the adjusted basis. 1040x efile Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040x efile These include the cost of any improvements having a useful life of more than 1 year. 1040x efile Rehabilitation expenses also increase basis. 1040x efile However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. 1040x efile If you have to recapture any of the credit, increase your basis by the recaptured amount. 1040x efile If you make additions or improvements to business property, keep separate accounts for them. 1040x efile Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. 1040x efile For more information, see Publication 946. 1040x efile The following items increase the basis of property. 1040x efile The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. 1040x efile Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040x efile Do not deduct them as taxes. 1040x efile However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. 1040x efile Example. 1040x efile Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. 1040x efile Add the assessment to your property's basis. 1040x efile In this example, the assessment is a depreciable asset. 1040x efile Deducting vs. 1040x efile Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. 1040x efile For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. 1040x efile However, you can choose either to deduct or to capitalize certain other costs. 1040x efile If you capitalize these costs, include them in your basis. 1040x efile If you deduct them, do not include them in your basis. 1040x efile See Uniform Capitalization Rules earlier. 1040x efile The costs you can choose to deduct or to capitalize include the following. 1040x efile Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. 1040x efile If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. 1040x efile For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. 1040x efile Table 1. 1040x efile Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. 1040x efile Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. 1040x efile Some of these items are discussed next. 1040x efile Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. 1040x efile You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. 1040x efile To make this determination, compare the repaired property to the property before the casualty. 1040x efile For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. 1040x efile Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. 1040x efile It reduces the basis of the affected part of the property. 1040x efile If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 1040x efile Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. 1040x efile For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. 1040x efile Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. 1040x efile This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. 1040x efile If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. 1040x efile Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 1040x efile For more information about the section 179 deduction, see Publication 946. 1040x efile Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. 1040x efile Reduce the basis of the property for which you received the subsidy by the excluded amount. 1040x efile For more information on this subsidy, see Publication 525. 1040x efile Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1040x efile If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 1040x efile If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040x efile Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. 1040x efile If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. 1040x efile In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. 1040x efile For information on figuring depreciation, see Publication 946. 1040x efile If you are claiming depreciation on a business vehicle, see Publication 463. 1040x efile If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. 1040x efile Include the excess depreciation in your gross income and add it to your basis in the property. 1040x efile For information on the computation of excess depreciation, see chapter 4 in Publication 463. 1040x efile Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 1040x efile A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040x efile You can exclude canceled debt from income in the following situations. 1040x efile Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). 1040x efile If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040x efile However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. 1040x efile For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. 1040x efile For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. 1040x efile For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. 1040x efile Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. 1040x efile For more information on the rules for the sale of a home, see Publication 523. 1040x efile Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. 1040x efile This also applies to amounts you received under an employer's adoption assistance program and excluded from income. 1040x efile For more information Form 8839, Qualified Adoption Expenses. 1040x efile Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. 1040x efile You must reduce your basis in that property by the credit claimed. 1040x efile For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. 1040x efile Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. 1040x efile You also paid commissions of $2,000 and title search and legal fees of $600. 1040x efile You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. 1040x efile Immediately you spent $20,000 in remodeling the building before you placed it in service. 1040x efile You were allowed depreciation of $14,526 for the years 2005 through 2009. 1040x efile In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. 1040x efile You claimed a deduction for this loss. 1040x efile You spent $5,500 to repair the damages and extend the useful life of the building. 1040x efile The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. 1040x efile It is not affected by any of the above adjustments. 1040x efile Basis Other Than Cost There are many times when you cannot use cost as basis. 1040x efile In these cases, the fair market value or the adjusted basis of property may be used. 1040x efile Adjusted basis is discussed earlier. 1040x efile Fair market value (FMV). 1040x efile   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 1040x efile Sales of similar property on or about the same date may be helpful in figuring the property's FMV. 1040x efile Property Received for Services If you receive property for services, include the property's FMV in income. 1040x efile The amount you include in income becomes your basis. 1040x efile If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 1040x efile Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. 1040x efile If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. 1040x efile Your basis in the property is its FMV (your purchase price plus the amount you include in income). 1040x efile If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. 1040x efile However, your basis in the property is still its FMV. 1040x efile See Employee Discounts in Publication 15-B. 1040x efile Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. 1040x efile Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. 1040x efile There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. 1040x efile When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. 1040x efile Example. 1040x efile Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. 1040x efile The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. 1040x efile You do not report any income until you have completed the 5 years of service that satisfy the condition. 1040x efile Fair market value. 1040x efile   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. 1040x efile Example. 1040x efile You received stock from your employer for services you performed. 1040x efile If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. 1040x efile At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. 1040x efile This is a restriction that by its terms will never end and you must consider it when you figure the FMV. 1040x efile Election. 1040x efile   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. 1040x efile If you make this choice, the substantially vested rules do not apply. 1040x efile Your basis is the amount you paid plus the amount you included in income. 1040x efile   See the discussion of Restricted Property in Publication 525 for more information. 1040x efile Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 1040x efile A taxable gain or deductible loss is also known as a recognized gain or loss. 1040x efile If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. 1040x efile A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. 1040x efile Example. 1040x efile You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. 1040x efile You must report a taxable gain of $3,000 for the land. 1040x efile The tractor has a basis of $6,000. 1040x efile Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. 1040x efile Similar or related property. 1040x efile   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. 1040x efile However, make the following adjustments. 1040x efile Decrease the basis by the following. 1040x efile Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. 1040x efile Increase the basis by the following. 1040x efile Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. 1040x efile Money or property not similar or related. 1040x efile   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. 1040x efile Example. 1040x efile The state condemned your property. 1040x efile The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. 1040x efile You realized a gain of $5,000 ($31,000 − $26,000). 1040x efile You bought replacement property similar in use to the converted property for $29,000. 1040x efile You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 1040x efile Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 1040x efile The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. 1040x efile   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040x efile Example. 1040x efile The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. 1040x efile Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. 1040x efile More information. 1040x efile   For more information about condemnations, see Involuntary Conversions in Publication 544. 1040x efile For more information about casualty and theft losses, see Publication 547. 1040x efile Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040x efile If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040x efile A nontaxable gain or loss is also known as an unrecognized gain or loss. 1040x efile Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040x efile To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 1040x efile There must also be an exchange of like-kind property. 1040x efile For more information, see Like-Kind Exchanges in Publication 544. 1040x efile The basis of the property you receive is the same as the basis of the property you gave up. 1040x efile Example. 1040x efile You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. 1040x efile Your basis in the new property is the same as the basis of the old ($50,000). 1040x efile Exchange expenses. 1040x efile   Exchange expenses are generally the closing costs you pay. 1040x efile They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. 1040x efile Add them to the basis of the like-kind property received. 1040x efile Property plus cash. 1040x efile   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. 1040x efile Example. 1040x efile You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. 1040x efile Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). 1040x efile Special rules for related persons. 1040x efile   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 1040x efile Each person must report any gain or loss not recognized on the original exchange. 1040x efile Each person reports it on the tax return filed for the year in which the later disposition occurs. 1040x efile If this rule applies, the basis of the property received in the original exchange will be its fair market value. 1040x efile   These rules generally do not apply to the following kinds of property dispositions. 1040x efile Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. 1040x efile Related persons. 1040x efile   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. 1040x efile   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. 1040x efile ), see Nondeductible Loss in chapter 2 of Publication 544. 1040x efile Exchange of business property. 1040x efile   Exchanging the assets of one business for the assets of another business is a multiple property exchange. 1040x efile For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x efile Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. 1040x efile The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. 1040x efile Decrease the basis by the following amounts. 1040x efile Any money you receive, and Any loss you recognize on the exchange. 1040x efile Increase the basis by the following amounts. 1040x efile Any additional costs you incur, and Any gain you recognize on the exchange. 1040x efile If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040x efile Example. 1040x efile You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. 1040x efile You realized a gain of $200 ($6,200 − $6,000). 1040x efile This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). 1040x efile You include all the gain in income (recognized gain) because the gain is less than the cash received. 1040x efile Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. 1040x efile   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040x efile The rest is the basis of the like property. 1040x efile Example. 1040x efile You had an adjusted basis of $15,000 in real estate you held for investment. 1040x efile You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. 1040x efile The truck is unlike property. 1040x efile You realized a gain of $1,500 ($16,500 − $15,000). 1040x efile This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). 1040x efile You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 1040x efile Your basis in the properties you received is figured as follows. 1040x efile Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). 1040x efile This is the truck's FMV. 1040x efile The rest ($12,500) is the basis of the real estate. 1040x efile Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 1040x efile Example. 1040x efile You are a salesperson and you use one of your cars 100% for business. 1040x efile You have used this car in your sales activities for 2 years and have depreciated it. 1040x efile Your adjusted basis in the car is $22,600 and its FMV is $23,100. 1040x efile You are interested in a new car, which sells for $28,000. 1040x efile If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). 1040x efile However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. 1040x efile Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). 1040x efile Your basis for depreciating the new car is $27,500, the same as if you traded the old car. 1040x efile Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. 1040x efile The first is an exchange of like-kind property. 1040x efile The second is personal-use property on which gain is recognized and loss is not recognized. 1040x efile First, figure your adjusted basis in the property as if you transferred two separate properties. 1040x efile Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. 1040x efile Deduct the depreciation you took or could have taken from the adjusted basis of the business part. 1040x efile Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. 1040x efile The business part of the property is permitted to be exchanged tax free. 1040x efile However, you must recognize any gain from the exchange of the nonbusiness part. 1040x efile You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. 1040x efile The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. 1040x efile If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. 1040x efile For more information, see Publication 523. 1040x efile Trade of car used partly in business. 1040x efile   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. 1040x efile   For information on figuring your basis for depreciation, see Publication 463. 1040x efile Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. 1040x efile However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. 1040x efile This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. 1040x efile If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. 1040x efile Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. 1040x efile For more information on these bonds, see Publication 550. 1040x efile At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. 1040x efile For more information, see Publication 504, Divorced or Separated Individuals. 1040x efile Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. 1040x efile FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 1040x efile Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. 1040x efile Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). 1040x efile If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. 1040x efile Example. 1040x efile You received an acre of land as a gift. 1040x efile At the time of the gift, the land had an FMV of $8,000. 1040x efile The donor's adjusted basis was $10,000. 1040x efile After you received the land, no events occurred to increase or decrease your basis. 1040x efile If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. 1040x efile If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. 1040x efile If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 1040x efile For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. 1040x efile If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. 1040x efile Business property. 1040x efile   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040x efile FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. 1040x efile Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040x efile Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. 1040x efile See Adjusted Basis earlier. 1040x efile Gift received before 1977. 1040x efile   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. 1040x efile However, do not increase your basis above the FMV of the gift at the time it was given to you. 1040x efile Example 1. 1040x efile You were given a house in 1976 with an FMV of $21,000. 1040x efile The donor's adjusted basis was $20,000. 1040x efile The donor paid a gift tax of $500. 1040x efile Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. 1040x efile Example 2. 1040x efile If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. 1040x efile This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. 1040x efile Gift received after 1976. 1040x efile   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. 1040x efile Figure the increase by multiplying the gift tax paid by a fraction. 1040x efile The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 1040x efile   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. 1040x efile The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040x efile For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 1040x efile Example. 1040x efile In 2010, you received a gift of property from your mother that had an FMV of $50,000. 1040x efile Her adjusted basis was $20,000. 1040x efile The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). 1040x efile She paid a gift tax of $9,000. 1040x efile Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . 1040x efile 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. 1040x efile See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 1040x efile If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. 1040x efile The FMV of the property at the date of the individual's death. 1040x efile The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. 1040x efile For information on the alternate valuation date, see the Instructions for Form 706. 1040x efile The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. 1040x efile This method is discussed later. 1040x efile The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. 1040x efile For information on a qualified conservation easement, see the Instructions for Form 706. 1040x efile If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 1040x efile For more information, see the Instructions for Form 706. 1040x efile Appreciated property. 1040x efile   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. 1040x efile Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. 1040x efile Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. 1040x efile Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. 1040x efile When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. 1040x efile For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. 1040x efile For example, you and your spouse owned community property that had a basis of $80,000. 1040x efile When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 1040x efile The FMV of the community interest was $100,000. 1040x efile The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 1040x efile The basis of the other half to your spouse's heirs is also $50,000. 1040x efile For more information on community property, see Publication 555, Community Property. 1040x efile Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. 1040x efile Example. 1040x efile John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. 1040x efile John furnished two-thirds of the purchase price and Jim furnished one-third. 1040x efile Depreciation deductions allowed before John's death were $12,000. 1040x efile Under local law, each had a half interest in the income from the property. 1040x efile At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. 1040x efile Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. 1040x efile This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. 1040x efile If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. 1040x efile Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. 1040x efile It does not matter how much each spouse contributed to the purchase price. 1040x efile Also, it does not matter which spouse dies first. 1040x efile A qualified joint interest is any interest in property held by husband and wife as either of the following. 1040x efile Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. 1040x efile Basis. 1040x efile   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. 1040x efile Decrease the cost by any deductions allowed to you for depreciation and depletion. 1040x efile Increase the reduced cost by your basis in the half you inherited. 1040x efile Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. 1040x efile If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. 1040x efile If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. 1040x efile Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040x efile Special-use valuation. 1040x efile   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. 1040x efile Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 1040x efile Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. 1040x efile Figure all FMVs without regard to the special-use valuation. 1040x efile   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040x efile This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. 1040x efile   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. 1040x efile If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 1040x efile The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. 1040x efile   You make the election by filing with Form 706-A a statement that does all of the following. 1040x efile Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. 1040x efile   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. 1040x efile Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 1040x efile An example of changing property held for personal use to business use would be renting out your former main home. 1040x efile Basis for depreciation. 1040x efile   The basis for depreciation is the lesser of the following amounts. 1040x efile The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 1040x efile Example. 1040x efile Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. 1040x efile You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. 1040x efile Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 1040x efile Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 1040x efile On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 1040x efile The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). 1040x efile Sale of property. 1040x efile   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. 1040x efile Gain. 1040x efile   The basis for figuring a gain is your adjusted basis when you sell the property. 1040x efile Example. 1040x efile Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. 1040x efile Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 1040x efile Loss. 1040x efile   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 1040x efile Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. 1040x efile Example. 1040x efile Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. 1040x efile In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. 1040x efile Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). 1040x efile How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. 1040x efile By selecting the method that is best for you, you will have quick and easy access to tax help. 1040x efile Contacting your Taxpayer Advocate. 1040x efile   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. 1040x efile We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. 1040x efile Here are seven things every taxpayer should know about TAS. 1040x efile TAS is your voice at the IRS. 1040x efile Our service is free, confidential, and tailored to meet your needs. 1040x efile You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. 1040x efile We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. 1040x efile This includes businesses as well as individuals. 1040x efile Our employees know the IRS and how to navigate it. 1040x efile If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. 1040x efile We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. 1040x efile You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. 1040x efile irs. 1040x efile gov/advocate. 1040x efile You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. 1040x efile You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. 1040x efile taxtoolkit. 1040x efile irs. 1040x efile gov. 1040x efile You can get updates on hot tax topics by visiting our YouTube channel at www. 1040x efile youtube. 1040x efile com/tasnta and our Facebook page at www. 1040x efile facebook. 1040x efile com/YourVoiceAtIRS, or by following our tweets at www. 1040x efile twitter. 1040x efile com/YourVoiceAtIRS. 1040x efile Low Income Taxpayer Clinics (LITCs). 1040x efile   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. 1040x efile LITCs are independent from the IRS. 1040x efile Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. 1040x efile If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. 1040x efile For more information, see Publication 4134, Low Income Taxpayer Clinic List. 1040x efile This publication is available at IRS. 1040x efile gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. 1040x efile Free tax services. 1040x efile   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. 1040x efile Learn about free tax information from the IRS, including publications, services, and education and assistance programs. 1040x efile The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. 1040x efile The majority of the information and services listed in this publication are available to you free of charge. 1040x efile If there is a fee associated with a resource or service, it is listed in the publication. 1040x efile   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d