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2010 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). 2010 Cost Basis The basis of property you buy is usually its cost. 2010 The cost is the amount you pay in cash, debt obligations, other property, or services. 2010 Your cost also includes amounts you pay for the following items. 2010 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). 2010 You may also have to capitalize (add to basis) certain other costs related to buying or producing property. 2010 Loans with low or no interest. 2010 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. 2010 You generally have unstated interest if your interest rate is less than the applicable federal rate. 2010 For more information, see Unstated Interest and Original Issue Discount in Publication 537. 2010 Purchase of a business. 2010 When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. 2010 Allocate the price among the various assets, including any section 197 intangibles. 2010 See Allocating the Basis, later. 2010 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. 2010 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. 2010 You must adjust the basis of stocks for certain events that occur after purchase. 2010 See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. 2010 Identifying stock or bonds sold. 2010 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. 2010 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. 2010 For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 2010 Mutual fund shares. 2010 If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. 2010 For more information, see Publication 550. 2010 Real Property Real property, also called real estate, is land and generally anything built on or attached to it. 2010 If you buy real property, certain fees and other expenses become part of your cost basis in the property. 2010 Real estate taxes. 2010 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. 2010 You cannot deduct them as taxes. 2010 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. 2010 Do not include that amount in the basis of the property. 2010 If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 2010 Settlement costs. 2010 Your basis includes the settlement fees and closing costs for buying property. 2010 You cannot include in your basis the fees and costs for getting a loan on property. 2010 A fee for buying property is a cost that must be paid even if you bought the property for cash. 2010 The following items are some of the settlement fees or closing costs you can include in the basis of your property. 2010 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. 2010 Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 2010 The following items are some settlement fees and closing costs you cannot include in the basis of the property. 2010 Casualty insurance premiums. 2010 Rent for occupancy of the property before closing. 2010 Charges for utilities or other services related to occupancy of the property before closing. 2010 Charges connected with getting a loan. 2010 The following are examples of these charges. 2010 Points (discount points, loan origination fees). 2010 Mortgage insurance premiums. 2010 Loan assumption fees. 2010 Cost of a credit report. 2010 Fees for an appraisal required by a lender. 2010 Fees for refinancing a mortgage. 2010 If these costs relate to business property, items (1) through (3) are deductible as business expenses. 2010 Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. 2010 Points. 2010 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. 2010 Generally, you deduct the points over the term of the loan. 2010 For more information on how to deduct points, see Points in chapter 4 of Publication 535. 2010 Points on home mortgage. 2010 Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. 2010 If certain requirements are met, you can deduct the points in full for the year in which they are paid. 2010 Reduce the basis of your home by any seller-paid points. 2010 For more information, see Points in Publication 936, Home Mortgage Interest Deduction. 2010 Assumption of mortgage. 2010 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. 2010 Example. 2010 If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. 2010 Constructing assets. 2010 If you build property or have assets built for you, your expenses for this construction are part of your basis. 2010 Some of these expenses include the following costs. 2010 Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 2010 In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. 2010 You must include them in the asset's basis. 2010 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. 2010 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. 2010 Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. 2010 If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. 2010 In certain circumstances, you may be subject to the uniform capitalization rules, next. 2010 Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. 2010 Activities subject to the rules. 2010 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. 2010 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. 2010 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. 2010 You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. 2010 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. 2010 Tangible personal property includes films, sound recordings, video tapes, books, or similar property. 2010 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. 2010 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. 2010 You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 2010 Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. 2010 Example. 2010 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. 2010 The nondeductible part of the cost is not subject to the uniform capitalization rules. 2010 More information. 2010 For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. 2010 Exceptions. 2010 The following are not subject to the uniform capitalization rules. 2010 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. 2010 For other exceptions to the uniform capitalization rules, see section 1. 2010 263A-1(b) of the regulations. 2010 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. 2010 Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. 2010 The basis of an intangible asset is usually the cost to buy or create it. 2010 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. 2010 The basis of certain intangibles can be amortized. 2010 See chapter 8 of Publication 535 for information on the amortization of these costs. 2010 Patents. 2010 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. 2010 If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. 2010 The value of the inventor's time spent on an invention is not part of the basis. 2010 Copyrights. 2010 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. 2010 Do not include the value of your time as the author, or any other person's time you did not pay for. 2010 Franchises, trademarks, and trade names. 2010 If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. 2010 Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. 2010 You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 2010 See Trade or Business Acquired below. 2010 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. 2010 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. 2010 However, see Trade or Business Acquired, next. 2010 Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. 2010 Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. 2010 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. 2010 Certificates of deposit, U. 2010 S. 2010 Government securities, foreign currency, and actively traded personal property, including stock and securities. 2010 Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. 2010 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. 2010 All other assets except section 197 intangibles, goodwill, and going concern value. 2010 Section 197 intangibles except goodwill and going concern value. 2010 Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 2010 Agreement. 2010 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. 2010 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 2010 Reporting requirement. 2010 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. 2010 Use Form 8594 to provide this information. 2010 The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 2010 More information. 2010 See Sale of a Business in chapter 2 of Publication 544 for more information. 2010 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. 2010 Figure the basis of each asset by multiplying the lump sum by a fraction. 2010 The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 2010 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. 2010 Demolition of building. 2010 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. 2010 Do not claim the costs as a current deduction. 2010 Modification of building. 2010 A modification of a building will not be treated as a demolition if the following conditions are satisfied. 2010 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. 2010 If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. 2010 If these conditions are met, add the costs of the modifications to the basis of the building. 2010 Subdivided lots. 2010 If you buy a tract of land and subdivide it, you must determine the basis of each lot. 2010 This is necessary because you must figure the gain or loss on the sale of each individual lot. 2010 As a result, you do not recover your entire cost in the tract until you have sold all of the lots. 2010 To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. 2010 The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. 2010 Future improvement costs. 2010 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. 2010 See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. 2010 Use of erroneous cost basis. 2010 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. 2010 Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. 2010 Example. 2010 You bought a tract of land to which you assigned a cost of $15,000. 2010 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. 2010 You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. 2010 Several years later you determine that your original basis in the tract was $22,500 and not $15,000. 2010 You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. 2010 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). 2010 You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. 2010 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. 2010 The result of these adjustments to the basis is the adjusted basis. 2010 Increases to Basis Increase the basis of any property by all items properly added to a capital account. 2010 These include the cost of any improvements having a useful life of more than 1 year. 2010 Rehabilitation expenses also increase basis. 2010 However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. 2010 If you have to recapture any of the credit, increase your basis by the recaptured amount. 2010 If you make additions or improvements to business property, keep separate accounts for them. 2010 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. 2010 For more information, see Publication 946. 2010 The following items increase the basis of property. 2010 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. 2010 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. 2010 Do not deduct them as taxes. 2010 However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. 2010 Example. 2010 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. 2010 Add the assessment to your property's basis. 2010 In this example, the assessment is a depreciable asset. 2010 Deducting vs. 2010 Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. 2010 For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. 2010 However, you can choose either to deduct or to capitalize certain other costs. 2010 If you capitalize these costs, include them in your basis. 2010 If you deduct them, do not include them in your basis. 2010 See Uniform Capitalization Rules earlier. 2010 The costs you can choose to deduct or to capitalize include the following. 2010 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. 2010 If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. 2010 For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. 2010 Table 1. 2010 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. 2010 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. 2010 Some of these items are discussed next. 2010 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. 2010 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. 2010 To make this determination, compare the repaired property to the property before the casualty. 2010 For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. 2010 Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. 2010 It reduces the basis of the affected part of the property. 2010 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. 2010 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. 2010 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. 2010 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. 2010 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. 2010 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. 2010 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. 2010 For more information about the section 179 deduction, see Publication 946. 2010 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. 2010 Reduce the basis of the property for which you received the subsidy by the excluded amount. 2010 For more information on this subsidy, see Publication 525. 2010 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. 2010 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. 2010 If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 2010 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. 2010 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. 2010 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. 2010 For information on figuring depreciation, see Publication 946. 2010 If you are claiming depreciation on a business vehicle, see Publication 463. 2010 If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. 2010 Include the excess depreciation in your gross income and add it to your basis in the property. 2010 For information on the computation of excess depreciation, see chapter 4 in Publication 463. 2010 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. 2010 A debt includes any indebtedness for which you are liable or which attaches to property you hold. 2010 You can exclude canceled debt from income in the following situations. 2010 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). 2010 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. 2010 However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. 2010 For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. 2010 For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. 2010 For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. 2010 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. 2010 For more information on the rules for the sale of a home, see Publication 523. 2010 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. 2010 This also applies to amounts you received under an employer's adoption assistance program and excluded from income. 2010 For more information Form 8839, Qualified Adoption Expenses. 2010 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. 2010 You must reduce your basis in that property by the credit claimed. 2010 For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. 2010 Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. 2010 You also paid commissions of $2,000 and title search and legal fees of $600. 2010 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. 2010 Immediately you spent $20,000 in remodeling the building before you placed it in service. 2010 You were allowed depreciation of $14,526 for the years 2005 through 2009. 2010 In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. 2010 You claimed a deduction for this loss. 2010 You spent $5,500 to repair the damages and extend the useful life of the building. 2010 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. 2010 It is not affected by any of the above adjustments. 2010 Basis Other Than Cost There are many times when you cannot use cost as basis. 2010 In these cases, the fair market value or the adjusted basis of property may be used. 2010 Adjusted basis is discussed earlier. 2010 Fair market value (FMV). 2010 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. 2010 Sales of similar property on or about the same date may be helpful in figuring the property's FMV. 2010 Property Received for Services If you receive property for services, include the property's FMV in income. 2010 The amount you include in income becomes your basis. 2010 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. 2010 Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. 2010 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. 2010 Your basis in the property is its FMV (your purchase price plus the amount you include in income). 2010 If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. 2010 However, your basis in the property is still its FMV. 2010 See Employee Discounts in Publication 15-B. 2010 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. 2010 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. 2010 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. 2010 When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. 2010 Example. 2010 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. 2010 The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. 2010 You do not report any income until you have completed the 5 years of service that satisfy the condition. 2010 Fair market value. 2010 Figure the FMV of property you received without considering any restriction except one that by its terms will never end. 2010 Example. 2010 You received stock from your employer for services you performed. 2010 If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. 2010 At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. 2010 This is a restriction that by its terms will never end and you must consider it when you figure the FMV. 2010 Election. 2010 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. 2010 If you make this choice, the substantially vested rules do not apply. 2010 Your basis is the amount you paid plus the amount you included in income. 2010 See the discussion of Restricted Property in Publication 525 for more information. 2010 Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 2010 A taxable gain or deductible loss is also known as a recognized gain or loss. 2010 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. 2010 A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. 2010 Example. 2010 You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. 2010 You must report a taxable gain of $3,000 for the land. 2010 The tractor has a basis of $6,000. 2010 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. 2010 Similar or related property. 2010 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. 2010 However, make the following adjustments. 2010 Decrease the basis by the following. 2010 Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. 2010 Increase the basis by the following. 2010 Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. 2010 Money or property not similar or related. 2010 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. 2010 Example. 2010 The state condemned your property. 2010 The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. 2010 You realized a gain of $5,000 ($31,000 − $26,000). 2010 You bought replacement property similar in use to the converted property for $29,000. 2010 You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 2010 Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 2010 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. 2010 If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 2010 Example. 2010 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. 2010 Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. 2010 More information. 2010 For more information about condemnations, see Involuntary Conversions in Publication 544. 2010 For more information about casualty and theft losses, see Publication 547. 2010 Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 2010 If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 2010 A nontaxable gain or loss is also known as an unrecognized gain or loss. 2010 Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 2010 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. 2010 There must also be an exchange of like-kind property. 2010 For more information, see Like-Kind Exchanges in Publication 544. 2010 The basis of the property you receive is the same as the basis of the property you gave up. 2010 Example. 2010 You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. 2010 Your basis in the new property is the same as the basis of the old ($50,000). 2010 Exchange expenses. 2010 Exchange expenses are generally the closing costs you pay. 2010 They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. 2010 Add them to the basis of the like-kind property received. 2010 Property plus cash. 2010 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. 2010 Example. 2010 You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. 2010 Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). 2010 Special rules for related persons. 2010 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. 2010 Each person must report any gain or loss not recognized on the original exchange. 2010 Each person reports it on the tax return filed for the year in which the later disposition occurs. 2010 If this rule applies, the basis of the property received in the original exchange will be its fair market value. 2010 These rules generally do not apply to the following kinds of property dispositions. 2010 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. 2010 Related persons. 2010 Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. 2010 For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. 2010 ), see Nondeductible Loss in chapter 2 of Publication 544. 2010 Exchange of business property. 2010 Exchanging the assets of one business for the assets of another business is a multiple property exchange. 2010 For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 2010 Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. 2010 The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. 2010 Decrease the basis by the following amounts. 2010 Any money you receive, and Any loss you recognize on the exchange. 2010 Increase the basis by the following amounts. 2010 Any additional costs you incur, and Any gain you recognize on the exchange. 2010 If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 2010 Example. 2010 You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. 2010 You realized a gain of $200 ($6,200 − $6,000). 2010 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). 2010 You include all the gain in income (recognized gain) because the gain is less than the cash received. 2010 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. 2010 Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 2010 The rest is the basis of the like property. 2010 Example. 2010 You had an adjusted basis of $15,000 in real estate you held for investment. 2010 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. 2010 The truck is unlike property. 2010 You realized a gain of $1,500 ($16,500 − $15,000). 2010 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). 2010 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. 2010 Your basis in the properties you received is figured as follows. 2010 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). 2010 This is the truck's FMV. 2010 The rest ($12,500) is the basis of the real estate. 2010 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. 2010 Example. 2010 You are a salesperson and you use one of your cars 100% for business. 2010 You have used this car in your sales activities for 2 years and have depreciated it. 2010 Your adjusted basis in the car is $22,600 and its FMV is $23,100. 2010 You are interested in a new car, which sells for $28,000. 2010 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). 2010 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. 2010 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). 2010 Your basis for depreciating the new car is $27,500, the same as if you traded the old car. 2010 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. 2010 The first is an exchange of like-kind property. 2010 The second is personal-use property on which gain is recognized and loss is not recognized. 2010 First, figure your adjusted basis in the property as if you transferred two separate properties. 2010 Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. 2010 Deduct the depreciation you took or could have taken from the adjusted basis of the business part. 2010 Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. 2010 The business part of the property is permitted to be exchanged tax free. 2010 However, you must recognize any gain from the exchange of the nonbusiness part. 2010 You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. 2010 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. 2010 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. 2010 For more information, see Publication 523. 2010 Trade of car used partly in business. 2010 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. 2010 For information on figuring your basis for depreciation, see Publication 463. 2010 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. 2010 However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. 2010 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. 2010 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. 2010 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. 2010 For more information on these bonds, see Publication 550. 2010 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. 2010 For more information, see Publication 504, Divorced or Separated Individuals. 2010 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. 2010 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. 2010 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. 2010 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). 2010 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. 2010 Example. 2010 You received an acre of land as a gift. 2010 At the time of the gift, the land had an FMV of $8,000. 2010 The donor's adjusted basis was $10,000. 2010 After you received the land, no events occurred to increase or decrease your basis. 2010 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. 2010 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. 2010 If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 2010 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. 2010 If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. 2010 Business property. 2010 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. 2010 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. 2010 Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 2010 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. 2010 See Adjusted Basis earlier. 2010 Gift received before 1977. 2010 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. 2010 However, do not increase your basis above the FMV of the gift at the time it was given to you. 2010 Example 1. 2010 You were given a house in 1976 with an FMV of $21,000. 2010 The donor's adjusted basis was $20,000. 2010 The donor paid a gift tax of $500. 2010 Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. 2010 Example 2. 2010 If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. 2010 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. 2010 Gift received after 1976. 2010 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. 2010 Figure the increase by multiplying the gift tax paid by a fraction. 2010 The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 2010 The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. 2010 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. 2010 For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 2010 Example. 2010 In 2010, you received a gift of property from your mother that had an FMV of $50,000. 2010 Her adjusted basis was $20,000. 2010 The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). 2010 She paid a gift tax of $9,000. 2010 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) . 2010 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. 2010 See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 2010 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. 2010 The FMV of the property at the date of the individual's death. 2010 The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. 2010 For information on the alternate valuation date, see the Instructions for Form 706. 2010 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. 2010 This method is discussed later. 2010 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. 2010 For information on a qualified conservation easement, see the Instructions for Form 706. 2010 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. 2010 For more information, see the Instructions for Form 706. 2010 Appreciated property. 2010 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. 2010 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. 2010 Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. 2010 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. 2010 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. 2010 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. 2010 For example, you and your spouse owned community property that had a basis of $80,000. 2010 When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 2010 The FMV of the community interest was $100,000. 2010 The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 2010 The basis of the other half to your spouse's heirs is also $50,000. 2010 For more information on community property, see Publication 555, Community Property. 2010 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. 2010 Example. 2010 John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. 2010 John furnished two-thirds of the purchase price and Jim furnished one-third. 2010 Depreciation deductions allowed before John's death were $12,000. 2010 Under local law, each had a half interest in the income from the property. 2010 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. 2010 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. 2010 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. 2010 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. 2010 Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. 2010 It does not matter how much each spouse contributed to the purchase price. 2010 Also, it does not matter which spouse dies first. 2010 A qualified joint interest is any interest in property held by husband and wife as either of the following. 2010 Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. 2010 Basis. 2010 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. 2010 Decrease the cost by any deductions allowed to you for depreciation and depletion. 2010 Increase the reduced cost by your basis in the half you inherited. 2010 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. 2010 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. 2010 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. 2010 Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 2010 Special-use valuation. 2010 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. 2010 Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 2010 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. 2010 Figure all FMVs without regard to the special-use valuation. 2010 You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 2010 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. 2010 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. 2010 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. 2010 The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. 2010 You make the election by filing with Form 706-A a statement that does all of the following. 2010 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. 2010 For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. 2010 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. 2010 An example of changing property held for personal use to business use would be renting out your former main home. 2010 Basis for depreciation. 2010 The basis for depreciation is the lesser of the following amounts. 2010 The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 2010 Example. 2010 Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. 2010 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. 2010 Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 2010 Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 2010 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. 2010 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). 2010 Sale of property. 2010 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. 2010 Gain. 2010 The basis for figuring a gain is your adjusted basis when you sell the property. 2010 Example. 2010 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. 2010 Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 2010 Loss. 2010 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. 2010 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. 2010 Example. 2010 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. 2010 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. 2010 Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). 2010 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. 2010 By selecting the method that is best for you, you will have quick and easy access to tax help. 2010 Contacting your Taxpayer Advocate. 2010 The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. 2010 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. 2010 Here are seven things every taxpayer should know about TAS. 2010 TAS is your voice at the IRS. 2010 Our service is free, confidential, and tailored to meet your needs. 2010 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. 2010 We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. 2010 This includes businesses as well as individuals. 2010 Our employees know the IRS and how to navigate it. 2010 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. 2010 We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. 2010 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. 2010 irs. 2010 gov/advocate. 2010 You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. 2010 You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. 2010 taxtoolkit. 2010 irs. 2010 gov. 2010 You can get updates on hot tax topics by visiting our YouTube channel at www. 2010 youtube. 2010 com/tasnta and our Facebook page at www. 2010 facebook. 2010 com/YourVoiceAtIRS, or by following our tweets at www. 2010 twitter. 2010 com/YourVoiceAtIRS. 2010 Low Income Taxpayer Clinics (LITCs). 2010 The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. 2010 LITCs are independent from the IRS. 2010 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. 2010 If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. 2010 For more information, see Publication 4134, Low Income Taxpayer Clinic List. 2010 This publication is available at IRS. 2010 gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. 2010 Free tax services. 2010 Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. 2010 Learn about free tax information from the IRS, including publications, services, and education and assistance programs. 2010 The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. 2010 The majority of the information and services listed in this publication are available to you free of charge. 2010 If there is a fee associated with a resource or service, it is listed in the publication. 2010 Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d
Understanding Your CP62 Notice
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2010 5. 2010 Table and Worksheets for the Self-Employed Table of Contents Community property laws. 2010 As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan. 2010 First, use either the rate table or rate worksheet to find your reduced contribution rate. 2010 Then complete the deduction worksheet to figure your deduction for contributions. 2010 The table and the worksheets in chapter 5 apply only to self-employed individuals who have only one defined contribution plan, such as a profit-sharing plan. 2010 A SEP plan is treated as a profit-sharing plan. 2010 However, do not use this worksheet for SARSEPs. 2010 Rate table for self-employed. 2010 If your plan's contribution rate is a whole percentage (for example, 12% rather than 12½%), you can use the table on the next page to find your reduced contribution rate. 2010 Otherwise, use the rate worksheet provided below. 2010 First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. 2010 Then read across to the rate under Column B. 2010 Enter the rate from Column B in step 4 of the Deduction Worksheet for Self-Employed on this page. 2010 Example. 2010 You are a sole proprietor with no employees. 2010 If your plan's contribution rate is 10% of a participant's compensation, your rate is 0. 2010 090909. 2010 Enter this rate in step 4 of the Deduction Worksheet for Self-Employed on this page. 2010 Deduction Worksheet for Self-Employed Step 1 Enter your net profit from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ (Form 1040); line 34, Schedule F (Form 1040)*; or box 14, code A**, Schedule K-1 (Form 1065)*. 2010 For information on other income included in net profit from self-employment, see the Instructions for Schedule SE, Form 1040. 2010 *Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b. 2010 **General partners should reduce this amount by the same additional expenses subtracted from box 14, code A to determine the amount on line 1 or 2 of Schedule SE. 2010 Step 2 Enter your deduction for self-employment tax from Form 1040, line 27 Step 3 Net earnings from self-employment. 2010 Subtract step 2 from step 1 Step 4 Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed Step 5 Multiply step 3 by step 4 Step 6 Multiply $255,000 by your plan contribution rate (not the reduced rate) Step 7 Enter the smaller of step 5 or step 6 Step 8 Contribution dollar limit $51,000 • If you made any elective deferrals to your self-employed plan, go to step 9. 2010 • Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21. 2010 Step 9 Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan during 2013. 2010 Do not enter more than $17,500 Step 10 Subtract step 9 from step 8 Step 11 Subtract step 9 from step 3 Step 12 Enter one-half of step 11 Step 13 Enter the smallest of step 7, 10, or 12 Step 14 Subtract step 13 from step 3 Step 15 Enter the smaller of step 9 or step 14 • If you made catch-up contributions, go to step 16. 2010 • Otherwise, skip steps 16 through 18 and go to step 19. 2010 Step 16 Subtract step 15 from step 14 Step 17 Enter your catch-up contributions (including designated Roth contributions), if any. 2010 Do not enter more than $5,500 Step 18 Enter the smaller of step 16 or step 17 Step 19 Add steps 13, 15, and 18. 2010 Step 20 Enter the amount of designated Roth contributions included on lines 9 and 17. 2010 Step 21 Subtract step 20 from step 19. 2010 This is your maximum deductible contribution. 2010 Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Form 1040, line 28. 2010 Rate worksheet for self-employed. 2010 If your plan's contribution rate is not a whole percentage (for example, 10½%), you cannot use the Rate Table for Self-Employed. 2010 Use the following worksheet instead. 2010 Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (for example, 10½% = 0. 2010 105) 2) Rate in line 1 plus 1 (for example, 0. 2010 105 + 1 = 1. 2010 105) 3) Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0. 2010 105 ÷ 1. 2010 105 = 0. 2010 095) Figuring your deduction. 2010 Now that you have your self-employed rate from either the rate table or rate worksheet, you can figure your maximum deduction for contributions for yourself by completing the Deduction Worksheet for Self-Employed. 2010 Community property laws. 2010 If you reside in a community property state and you are married and filing a separate return, disregard community property laws for step 1 of the Deduction Worksheet for Self-Employed. 2010 Enter on step 1 the total net profit you actually earned. 2010 Rate Table for Self-Employed Column A If the plan contri- bution rate is: (shown as %) Column B Your rate is: (shown as decimal) 1 . 2010 009901 2 . 2010 019608 3 . 2010 029126 4 . 2010 038462 5 . 2010 047619 6 . 2010 056604 7 . 2010 065421 8 . 2010 074074 9 . 2010 082569 10 . 2010 090909 11 . 2010 099099 12 . 2010 107143 13 . 2010 115044 14 . 2010 122807 15 . 2010 130435 16 . 2010 137931 17 . 2010 145299 18 . 2010 152542 19 . 2010 159664 20 . 2010 166667 21 . 2010 173554 22 . 2010 180328 23 . 2010 186992 24 . 2010 193548 25* . 2010 200000* *The deduction for annual employer contributions (other than elective deferrals) to a SEP plan, a profit-sharing plan, or a money purchase plan cannot be more than 20% of your net earnings (figured without deducting contributions for yourself) from the business that has the plan. 2010 Example. 2010 You are a sole proprietor with no employees. 2010 The terms of your plan provide that you contribute 8½% (. 2010 085) of your compensation to your plan. 2010 Your net profit from line 31, Schedule C (Form 1040) is $200,000. 2010 You have no elective deferrals or catch-up contributions. 2010 Your self-employment tax deduction on line 27 of Form 1040 is $9,728. 2010 See the filled-in portions of both Schedule SE (Form 1040), Self-Employment Income, and Form 1040, later. 2010 You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as follows. 2010 Deduction Worksheet for Self-Employed Step 1 Enter your net profit from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ (Form 1040); line 34, Schedule F (Form 1040)*; or box 14, code A**, Schedule K-1 (Form 1065)*. 2010 For information on other income included in net profit from self-employment, see the Instructions for Schedule SE, Form 1040. 2010 $200,000 *Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b. 2010 **General partners should reduce this amount by the same additional expenses subtracted from box 14, code A to determine the amount on line 1 or 2 of Schedule SE. 2010 Step 2 Enter your deduction for self-employment tax from Form 1040, line 27 9,728 Step 3 Net earnings from self-employment. 2010 Subtract step 2 from step 1 190,272 Step 4 Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed 0. 2010 078 Step 5 Multiply step 3 by step 4 14,841 Step 6 Multiply $255,000 by your plan contribution rate (not the reduced rate) 21,675 Step 7 Enter the smaller of step 5 or step 6 14,841 Step 8 Contribution dollar limit $51,000 • If you made any elective deferrals to your self-employed plan, go to step 9. 2010 • Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21. 2010 Step 9 Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan during 2013. 2010 Do not enter more than $17,500 N/A Step 10 Subtract step 9 from step 8 Step 11 Subtract step 9 from step 3 Step 12 Enter one-half of step 11 Step 13 Enter the smallest of step 7, 10, or 12 Step 14 Subtract step 13 from step 3 Step 15 Enter the smaller of step 9 or step 14 • If you made catch-up contributions, go to step 16. 2010 • Otherwise, skip steps 16 through 18 and go to step 19. 2010 Step 16 Subtract step 15 from step 14 Step 17 Enter your catch-up contributions (including designated Roth contributions), if any. 2010 Do not enter more than $5,500 Step 18 Enter the smaller of step 16 or step 17 Step 19 Add steps 13, 15, and 18. 2010 Step 20 Enter the amount of designated Roth contributions included on lines 9 and 17 Step 21 Subtract step 20 from step 19. 2010 This is your maximum deductible contribution $14,841 Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Form 1040, line 28. 2010 See the filled-in Deduction Worksheet for Self-Employed on this page. 2010 Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (for example, 10½% = 0. 2010 105) 0. 2010 085 2) Rate in line 1 plus 1 (for example, 0. 2010 105 + 1 = 1. 2010 105) 1. 2010 085 3) Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0. 2010 105 ÷ 1. 2010 105 = 0. 2010 095) 0. 2010 078 This image is too large to be displayed in the current screen. 2010 Please click the link to view the image. 2010 Portion of Form 1040 and Portion of Schedule SE Prev Up Next Home More Online Publications