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File state tax for free 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). File state tax for free Cost Basis The basis of property you buy is usually its cost. File state tax for free The cost is the amount you pay in cash, debt obligations, other property, or services. File state tax for free Your cost also includes amounts you pay for the following items. File state tax for free 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). File state tax for free  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. File state tax for free Loans with low or no interest. File state tax for free   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. File state tax for free You generally have unstated interest if your interest rate is less than the applicable federal rate. File state tax for free For more information, see Unstated Interest and Original Issue Discount in Publication 537. File state tax for free Purchase of a business. File state tax for free   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. File state tax for free Allocate the price among the various assets, including any section 197 intangibles. File state tax for free See Allocating the Basis, later. File state tax for free 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. File state tax for free 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. File state tax for free You must adjust the basis of stocks for certain events that occur after purchase. File state tax for free See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. File state tax for free Identifying stock or bonds sold. File state tax for free   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. File state tax for free 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. File state tax for free For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. File state tax for free Mutual fund shares. File state tax for free   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. File state tax for free For more information, see Publication 550. File state tax for free Real Property Real property, also called real estate, is land and generally anything built on or attached to it. File state tax for free If you buy real property, certain fees and other expenses become part of your cost basis in the property. File state tax for free Real estate taxes. File state tax for free   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. File state tax for free You cannot deduct them as taxes. File state tax for free   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. File state tax for free Do not include that amount in the basis of the property. File state tax for free If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. File state tax for free Settlement costs. File state tax for free   Your basis includes the settlement fees and closing costs for buying property. File state tax for free You cannot include in your basis the fees and costs for getting a loan on property. File state tax for free A fee for buying property is a cost that must be paid even if you bought the property for cash. File state tax for free   The following items are some of the settlement fees or closing costs you can include in the basis of your property. File state tax for free 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. File state tax for free   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. File state tax for free   The following items are some settlement fees and closing costs you cannot include in the basis of the property. File state tax for free Casualty insurance premiums. File state tax for free Rent for occupancy of the property before closing. File state tax for free Charges for utilities or other services related to occupancy of the property before closing. File state tax for free Charges connected with getting a loan. File state tax for free The following are examples of these charges. File state tax for free Points (discount points, loan origination fees). File state tax for free Mortgage insurance premiums. File state tax for free Loan assumption fees. File state tax for free Cost of a credit report. File state tax for free Fees for an appraisal required by a lender. File state tax for free Fees for refinancing a mortgage. File state tax for free If these costs relate to business property, items (1) through (3) are deductible as business expenses. File state tax for free Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. File state tax for free Points. File state tax for free   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. File state tax for free Generally, you deduct the points over the term of the loan. File state tax for free For more information on how to deduct points, see Points in chapter 4 of Publication 535. File state tax for free Points on home mortgage. File state tax for free   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. File state tax for free If certain requirements are met, you can deduct the points in full for the year in which they are paid. File state tax for free Reduce the basis of your home by any seller-paid points. File state tax for free For more information, see Points in Publication 936, Home Mortgage Interest Deduction. File state tax for free Assumption of mortgage. File state tax for free   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. File state tax for free Example. File state tax for free If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. File state tax for free Constructing assets. File state tax for free   If you build property or have assets built for you, your expenses for this construction are part of your basis. File state tax for free Some of these expenses include the following costs. File state tax for free Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. File state tax for free In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. File state tax for free You must include them in the asset's basis. File state tax for free 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. File state tax for free    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. File state tax for free Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. File state tax for free If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. File state tax for free In certain circumstances, you may be subject to the uniform capitalization rules, next. File state tax for free Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. File state tax for free Activities subject to the rules. File state tax for free   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. File state tax for free 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. File state tax for free 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. File state tax for free   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. File state tax for free 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. File state tax for free Tangible personal property includes films, sound recordings, video tapes, books, or similar property. File state tax for free    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. File state tax for free 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. File state tax for free You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. File state tax for free   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. File state tax for free Example. File state tax for free 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. File state tax for free The nondeductible part of the cost is not subject to the uniform capitalization rules. File state tax for free More information. File state tax for free   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. File state tax for free Exceptions. File state tax for free   The following are not subject to the uniform capitalization rules. File state tax for free 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. File state tax for free For other exceptions to the uniform capitalization rules, see section 1. File state tax for free 263A-1(b) of the regulations. File state tax for free   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. File state tax for free Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. File state tax for free The basis of an intangible asset is usually the cost to buy or create it. File state tax for free 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. File state tax for free The basis of certain intangibles can be amortized. File state tax for free See chapter 8 of Publication 535 for information on the amortization of these costs. File state tax for free Patents. File state tax for free   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. File state tax for free If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. File state tax for free The value of the inventor's time spent on an invention is not part of the basis. File state tax for free Copyrights. File state tax for free   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. File state tax for free Do not include the value of your time as the author, or any other person's time you did not pay for. File state tax for free Franchises, trademarks, and trade names. File state tax for free   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. File state tax for free Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. File state tax for free You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. File state tax for free See Trade or Business Acquired below. File state tax for free 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. File state tax for free 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. File state tax for free However, see Trade or Business Acquired, next. File state tax for free Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. File state tax for free Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. File state tax for free 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. File state tax for free Certificates of deposit, U. File state tax for free S. File state tax for free Government securities, foreign currency, and actively traded personal property, including stock and securities. File state tax for free Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. File state tax for free 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. File state tax for free All other assets except section 197 intangibles, goodwill, and going concern value. File state tax for free Section 197 intangibles except goodwill and going concern value. File state tax for free Goodwill and going concern value (whether or not they qualify as section 197 intangibles). File state tax for free Agreement. File state tax for free   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. File state tax for free This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. File state tax for free Reporting requirement. File state tax for free   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. File state tax for free Use Form 8594 to provide this information. File state tax for free The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. File state tax for free More information. File state tax for free   See Sale of a Business in chapter 2 of Publication 544 for more information. File state tax for free 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. File state tax for free Figure the basis of each asset by multiplying the lump sum by a fraction. File state tax for free The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. File state tax for free 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. File state tax for free Demolition of building. File state tax for free   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. File state tax for free Do not claim the costs as a current deduction. File state tax for free Modification of building. File state tax for free   A modification of a building will not be treated as a demolition if the following conditions are satisfied. File state tax for free 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. File state tax for free   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. File state tax for free   If these conditions are met, add the costs of the modifications to the basis of the building. File state tax for free Subdivided lots. File state tax for free   If you buy a tract of land and subdivide it, you must determine the basis of each lot. File state tax for free This is necessary because you must figure the gain or loss on the sale of each individual lot. File state tax for free As a result, you do not recover your entire cost in the tract until you have sold all of the lots. File state tax for free   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. File state tax for free The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. File state tax for free Future improvement costs. File state tax for free   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. File state tax for free See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. File state tax for free Use of erroneous cost basis. File state tax for free   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. File state tax for free Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. File state tax for free Example. File state tax for free You bought a tract of land to which you assigned a cost of $15,000. File state tax for free 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. File state tax for free You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. File state tax for free Several years later you determine that your original basis in the tract was $22,500 and not $15,000. File state tax for free You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. File state tax for free 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). File state tax for free You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. File state tax for free 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. File state tax for free The result of these adjustments to the basis is the adjusted basis. File state tax for free Increases to Basis Increase the basis of any property by all items properly added to a capital account. File state tax for free These include the cost of any improvements having a useful life of more than 1 year. File state tax for free Rehabilitation expenses also increase basis. File state tax for free However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. File state tax for free If you have to recapture any of the credit, increase your basis by the recaptured amount. File state tax for free If you make additions or improvements to business property, keep separate accounts for them. File state tax for free 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. File state tax for free For more information, see Publication 946. File state tax for free The following items increase the basis of property. File state tax for free 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. File state tax for free 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. File state tax for free Do not deduct them as taxes. File state tax for free However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. File state tax for free Example. File state tax for free 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. File state tax for free Add the assessment to your property's basis. File state tax for free In this example, the assessment is a depreciable asset. File state tax for free Deducting vs. File state tax for free Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. File state tax for free For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. File state tax for free However, you can choose either to deduct or to capitalize certain other costs. File state tax for free If you capitalize these costs, include them in your basis. File state tax for free If you deduct them, do not include them in your basis. File state tax for free See Uniform Capitalization Rules earlier. File state tax for free The costs you can choose to deduct or to capitalize include the following. File state tax for free 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. File state tax for free If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. File state tax for free For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. File state tax for free Table 1. File state tax for free 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. File state tax for free 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. File state tax for free Some of these items are discussed next. File state tax for free 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. File state tax for free 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. File state tax for free To make this determination, compare the repaired property to the property before the casualty. File state tax for free For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. File state tax for free Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. File state tax for free It reduces the basis of the affected part of the property. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free For more information about the section 179 deduction, see Publication 946. File state tax for free 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. File state tax for free Reduce the basis of the property for which you received the subsidy by the excluded amount. File state tax for free For more information on this subsidy, see Publication 525. File state tax for free 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. File state tax for free 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. File state tax for free If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free For information on figuring depreciation, see Publication 946. File state tax for free If you are claiming depreciation on a business vehicle, see Publication 463. File state tax for free If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. File state tax for free Include the excess depreciation in your gross income and add it to your basis in the property. File state tax for free For information on the computation of excess depreciation, see chapter 4 in Publication 463. File state tax for free 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. File state tax for free A debt includes any indebtedness for which you are liable or which attaches to property you hold. File state tax for free You can exclude canceled debt from income in the following situations. File state tax for free 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). File state tax for free 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. File state tax for free However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. File state tax for free For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. File state tax for free For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. File state tax for free For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. File state tax for free 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. File state tax for free For more information on the rules for the sale of a home, see Publication 523. File state tax for free 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. File state tax for free This also applies to amounts you received under an employer's adoption assistance program and excluded from income. File state tax for free For more information Form 8839, Qualified Adoption Expenses. File state tax for free 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. File state tax for free You must reduce your basis in that property by the credit claimed. File state tax for free For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. File state tax for free Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. File state tax for free You also paid commissions of $2,000 and title search and legal fees of $600. File state tax for free 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. File state tax for free Immediately you spent $20,000 in remodeling the building before you placed it in service. File state tax for free You were allowed depreciation of $14,526 for the years 2005 through 2009. File state tax for free In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. File state tax for free You claimed a deduction for this loss. File state tax for free You spent $5,500 to repair the damages and extend the useful life of the building. File state tax for free 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. File state tax for free It is not affected by any of the above adjustments. File state tax for free Basis Other Than Cost There are many times when you cannot use cost as basis. File state tax for free In these cases, the fair market value or the adjusted basis of property may be used. File state tax for free Adjusted basis is discussed earlier. File state tax for free Fair market value (FMV). File state tax for free   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. File state tax for free Sales of similar property on or about the same date may be helpful in figuring the property's FMV. File state tax for free Property Received for Services If you receive property for services, include the property's FMV in income. File state tax for free The amount you include in income becomes your basis. File state tax for free 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. File state tax for free Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. File state tax for free 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. File state tax for free Your basis in the property is its FMV (your purchase price plus the amount you include in income). File state tax for free If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. File state tax for free However, your basis in the property is still its FMV. File state tax for free See Employee Discounts in Publication 15-B. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. File state tax for free Example. File state tax for free 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. File state tax for free The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. File state tax for free You do not report any income until you have completed the 5 years of service that satisfy the condition. File state tax for free Fair market value. File state tax for free   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. File state tax for free Example. File state tax for free You received stock from your employer for services you performed. File state tax for free If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. File state tax for free At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. File state tax for free This is a restriction that by its terms will never end and you must consider it when you figure the FMV. File state tax for free Election. File state tax for free   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. File state tax for free If you make this choice, the substantially vested rules do not apply. File state tax for free Your basis is the amount you paid plus the amount you included in income. File state tax for free   See the discussion of Restricted Property in Publication 525 for more information. File state tax for free Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. File state tax for free A taxable gain or deductible loss is also known as a recognized gain or loss. File state tax for free 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. File state tax for free A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. File state tax for free Example. File state tax for free You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. File state tax for free You must report a taxable gain of $3,000 for the land. File state tax for free The tractor has a basis of $6,000. File state tax for free 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. File state tax for free Similar or related property. File state tax for free   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. File state tax for free However, make the following adjustments. File state tax for free Decrease the basis by the following. File state tax for free Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. File state tax for free Increase the basis by the following. File state tax for free Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. File state tax for free Money or property not similar or related. File state tax for free   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. File state tax for free Example. File state tax for free The state condemned your property. File state tax for free The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. File state tax for free You realized a gain of $5,000 ($31,000 − $26,000). File state tax for free You bought replacement property similar in use to the converted property for $29,000. File state tax for free You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. File state tax for free Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. File state tax for free 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. File state tax for free   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. File state tax for free Example. File state tax for free 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. File state tax for free Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. File state tax for free More information. File state tax for free   For more information about condemnations, see Involuntary Conversions in Publication 544. File state tax for free For more information about casualty and theft losses, see Publication 547. File state tax for free Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. File state tax for free If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. File state tax for free A nontaxable gain or loss is also known as an unrecognized gain or loss. File state tax for free Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. File state tax for free 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. File state tax for free There must also be an exchange of like-kind property. File state tax for free For more information, see Like-Kind Exchanges in Publication 544. File state tax for free The basis of the property you receive is the same as the basis of the property you gave up. File state tax for free Example. File state tax for free You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. File state tax for free Your basis in the new property is the same as the basis of the old ($50,000). File state tax for free Exchange expenses. File state tax for free   Exchange expenses are generally the closing costs you pay. File state tax for free They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. File state tax for free Add them to the basis of the like-kind property received. File state tax for free Property plus cash. File state tax for free   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. File state tax for free Example. File state tax for free You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. File state tax for free Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). File state tax for free Special rules for related persons. File state tax for free   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. File state tax for free Each person must report any gain or loss not recognized on the original exchange. File state tax for free Each person reports it on the tax return filed for the year in which the later disposition occurs. File state tax for free If this rule applies, the basis of the property received in the original exchange will be its fair market value. File state tax for free   These rules generally do not apply to the following kinds of property dispositions. File state tax for free 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. File state tax for free Related persons. File state tax for free   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. File state tax for free   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. File state tax for free ), see Nondeductible Loss in chapter 2 of Publication 544. File state tax for free Exchange of business property. File state tax for free   Exchanging the assets of one business for the assets of another business is a multiple property exchange. File state tax for free For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. File state tax for free Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. File state tax for free The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. File state tax for free Decrease the basis by the following amounts. File state tax for free Any money you receive, and Any loss you recognize on the exchange. File state tax for free Increase the basis by the following amounts. File state tax for free Any additional costs you incur, and Any gain you recognize on the exchange. File state tax for free If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. File state tax for free Example. File state tax for free You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. File state tax for free You realized a gain of $200 ($6,200 − $6,000). File state tax for free 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). File state tax for free You include all the gain in income (recognized gain) because the gain is less than the cash received. File state tax for free 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. File state tax for free   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. File state tax for free The rest is the basis of the like property. File state tax for free Example. File state tax for free You had an adjusted basis of $15,000 in real estate you held for investment. File state tax for free 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. File state tax for free The truck is unlike property. File state tax for free You realized a gain of $1,500 ($16,500 − $15,000). File state tax for free 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). File state tax for free 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. File state tax for free Your basis in the properties you received is figured as follows. File state tax for free 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). File state tax for free This is the truck's FMV. File state tax for free The rest ($12,500) is the basis of the real estate. File state tax for free 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. File state tax for free Example. File state tax for free You are a salesperson and you use one of your cars 100% for business. File state tax for free You have used this car in your sales activities for 2 years and have depreciated it. File state tax for free Your adjusted basis in the car is $22,600 and its FMV is $23,100. File state tax for free You are interested in a new car, which sells for $28,000. File state tax for free 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). File state tax for free 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. File state tax for free 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). File state tax for free Your basis for depreciating the new car is $27,500, the same as if you traded the old car. File state tax for free 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. File state tax for free The first is an exchange of like-kind property. File state tax for free The second is personal-use property on which gain is recognized and loss is not recognized. File state tax for free First, figure your adjusted basis in the property as if you transferred two separate properties. File state tax for free Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. File state tax for free Deduct the depreciation you took or could have taken from the adjusted basis of the business part. File state tax for free Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. File state tax for free The business part of the property is permitted to be exchanged tax free. File state tax for free However, you must recognize any gain from the exchange of the nonbusiness part. File state tax for free You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. File state tax for free 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. File state tax for free 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. File state tax for free For more information, see Publication 523. File state tax for free Trade of car used partly in business. File state tax for free   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. File state tax for free   For information on figuring your basis for depreciation, see Publication 463. File state tax for free 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. File state tax for free However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free For more information on these bonds, see Publication 550. File state tax for free 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. File state tax for free For more information, see Publication 504, Divorced or Separated Individuals. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free 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). File state tax for free 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. File state tax for free Example. File state tax for free You received an acre of land as a gift. File state tax for free At the time of the gift, the land had an FMV of $8,000. File state tax for free The donor's adjusted basis was $10,000. File state tax for free After you received the land, no events occurred to increase or decrease your basis. File state tax for free 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. File state tax for free 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. File state tax for free If the sales price is between $8,000 and $10,000, you have neither gain nor loss. File state tax for free 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. File state tax for free If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. File state tax for free Business property. File state tax for free   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. File state tax for free 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. File state tax for free Increase your basis by all or part of any gift tax paid, depending on the date of the gift. File state tax for free 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. File state tax for free See Adjusted Basis earlier. File state tax for free Gift received before 1977. File state tax for free   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. File state tax for free However, do not increase your basis above the FMV of the gift at the time it was given to you. File state tax for free Example 1. File state tax for free You were given a house in 1976 with an FMV of $21,000. File state tax for free The donor's adjusted basis was $20,000. File state tax for free The donor paid a gift tax of $500. File state tax for free Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. File state tax for free Example 2. File state tax for free If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. File state tax for free 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. File state tax for free Gift received after 1976. File state tax for free   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. File state tax for free Figure the increase by multiplying the gift tax paid by a fraction. File state tax for free The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. File state tax for free   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. File state tax for free 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. File state tax for free For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. File state tax for free Example. File state tax for free In 2010, you received a gift of property from your mother that had an FMV of $50,000. File state tax for free Her adjusted basis was $20,000. File state tax for free The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). File state tax for free She paid a gift tax of $9,000. File state tax for free 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) . File state tax for free 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. File state tax for free See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. File state tax for free 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. File state tax for free The FMV of the property at the date of the individual's death. File state tax for free The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. File state tax for free For information on the alternate valuation date, see the Instructions for Form 706. File state tax for free 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. File state tax for free This method is discussed later. File state tax for free 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. File state tax for free For information on a qualified conservation easement, see the Instructions for Form 706. File state tax for free 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. File state tax for free For more information, see the Instructions for Form 706. File state tax for free Appreciated property. File state tax for free   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. File state tax for free 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. File state tax for free Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free For example, you and your spouse owned community property that had a basis of $80,000. File state tax for free When your spouse died, half the FMV of the community interest was includible in your spouse's estate. File state tax for free The FMV of the community interest was $100,000. File state tax for free The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). File state tax for free The basis of the other half to your spouse's heirs is also $50,000. File state tax for free For more information on community property, see Publication 555, Community Property. File state tax for free 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. File state tax for free Example. File state tax for free John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. File state tax for free John furnished two-thirds of the purchase price and Jim furnished one-third. File state tax for free Depreciation deductions allowed before John's death were $12,000. File state tax for free Under local law, each had a half interest in the income from the property. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. File state tax for free It does not matter how much each spouse contributed to the purchase price. File state tax for free Also, it does not matter which spouse dies first. File state tax for free A qualified joint interest is any interest in property held by husband and wife as either of the following. File state tax for free Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. File state tax for free Basis. File state tax for free   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. File state tax for free Decrease the cost by any deductions allowed to you for depreciation and depletion. File state tax for free Increase the reduced cost by your basis in the half you inherited. File state tax for free 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. File state tax for free 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. File state tax for free 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. File state tax for free Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. File state tax for free Special-use valuation. File state tax for free   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. File state tax for free Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. File state tax for free 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. File state tax for free Figure all FMVs without regard to the special-use valuation. File state tax for free   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. File state tax for free 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. File state tax for free   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. File state tax for free 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. File state tax for free The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. File state tax for free   You make the election by filing with Form 706-A a statement that does all of the following. File state tax for free 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. File state tax for free   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. File state tax for free 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. File state tax for free An example of changing property held for personal use to business use would be renting out your former main home. File state tax for free Basis for depreciation. File state tax for free   The basis for depreciation is the lesser of the following amounts. 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Internal Revenue Bulletin:  2014-9 

February 24, 2014 

Notice 2014–10

Section 5000A Transition Relief for Individuals with Certain Government-Sponsored Limited-Benefit Health Coverage


This notice provides relief from the individual shared responsibility payment required under § 5000A of the Internal Revenue Code for months in 2014 in which individuals have, under Medicaid and chapter 55 of Title 10, U.S.C., limited-benefit health coverage that is not minimum essential coverage.

BACKGROUND

For each month beginning after December 31, 2013, § 5000A requires individuals to either maintain minimum essential coverage for themselves and any nonexempt family members, qualify for an exemption, or include an individual shared responsibility payment with their Federal income tax return. A taxpayer is liable under § 5000A for any nonexempt individual whom the taxpayer may claim as a dependent.

Under § 5000A(f)(1)(A), minimum essential coverage includes coverage under certain specified government-sponsored programs (“government-sponsored minimum essential coverage”). On August 30, 2013, the Treasury Department and the Internal Revenue Service (IRS) published final regulations under § 5000A. The final regulations provide that government-sponsored minimum essential coverage includes coverage under the Medicaid program under Title XIX of the Social Security Act (42 U.S.C. 1396 and following sections), other than the following limited coverage under Medicaid:

optional coverage of family planning services under section 1902(a)(10)(A)(ii)(XXI) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(ii)(XXI)) (“family planning services Medicaid”), optional coverage of tuberculosis-related services under section 1902(a)(10)(A)(ii)(XII) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(ii)(XII) (“tuberculosis-related services Medicaid”), coverage of pregnancy-related services under section 1902(a)(10)(A)(i)(IV) and (a)(10)(A)(ii)(IX) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(i)(IV), (a)(10)(A)(ii)(IX)) (“pregnancy-related Medicaid”), and coverage limited to treatment of emergency medical conditions in accordance with 8 U.S.C. 1611(b)(1)(A), as authorized by section 1903(v) of the Social Security Act (42 U.S.C. 1396b(v)) (“emergency medical conditions Medicaid”). The final § 5000A regulations also provide that government-sponsored minimum essential coverage includes medical coverage under chapter 55 of Title 10, U.S.C., including coverage under the TRICARE program.

The final § 5000A regulations reserve on whether certain government-sponsored programs that provide limited benefits are minimum essential coverage, including (i) coverage authorized under section 1115 of the Social Security Act (“Section 1115 demonstration projects”); (ii) coverage for medically needy individuals, see section 1902(a)(10)(C) of the Social Security Act (42 U.S.C. 1396a(a)(10)(C)) and 42 CFR 435.300 and following sections; (iii) coverage under section 1079(a), 1086(c)(1), or 1086(d)(1) of Title 10, U.S.C., for certain individuals who are excluded from TRICARE coverage for health care services from private sector providers and only eligible for space available care in a facility for the uniformed services (“space available care”); and (iv) coverage under sections 1074a and 1074b of Title 10, U.S.C., for individuals not on active duty who are entitled to episodic care for an injury, illness, or disease incurred or aggravated in the line of duty (“line-of-duty care”). See § 1.5000A–2(b)(2) (78 FR 53646, 53658).

The preamble to the final § 5000A regulations indicates that future guidance will provide that the government-sponsored limited-benefit coverage reserved on in the final § 5000A regulations is not minimum essential coverage. However, the preamble to the final § 5000A regulations also indicates that, if future rulemaking clarifies that such limited-benefit coverage is not minimum essential coverage, individuals with that coverage for a month in 2014 will not be subject to the § 5000A individual shared responsibility payment for that month. See T.D. 9632 (78 FR 53646, 53648–53650).

Proposed regulations (REG–141036–13) published concurrently with this notice provide that coverage under certain Section 1115 demonstration projects authorized under section 1115(a)(2) of the Social Security Act (42 U.S.C. 1315(a)(2)), coverage for medically needy individuals, space available care, and line-of-duty care is not government-sponsored minimum essential coverage.

DISCUSSION

Individuals enrolled in family planning services Medicaid, tuberculosis-related services Medicaid, pregnancy-related Medicaid, emergency medical conditions Medicaid, certain Section 1115 demonstration projects, coverage for medically needy individuals, space available care, or line-of-duty care may not know when enrolling for the 2014 coverage year that such coverage is not minimum essential coverage. Accordingly, to provide relief to individuals in this situation (or to taxpayers who are liable under § 5000A for other individuals in this situation), and consistent with the preamble to the final regulations, the § 5000A shared responsibility payment is not imposed with respect to an individual for months in 2014 when the individual has coverage under family planning services Medicaid, tuberculosis-related services Medicaid, pregnancy-related Medicaid, emergency medical conditions Medicaid, a Section 1115 demonstration project authorized under section 1115(a)(2) of the Social Security Act (42 U.S.C. 1315(a)(2)), coverage for medically needy individuals, space available care, or line-of-duty care.

The relief provided by this notice applies only for determining a taxpayer’s § 5000A individual shared responsibility payment for not maintaining minimum essential coverage in 2014. Solely for the purpose of determining whether a period without coverage qualifies as a short coverage gap described in § 5000A(e)(4), an individual will be treated as having minimum essential coverage for any month in 2014 when that individual is eligible for the transition relief provided by this notice.

DRAFTING INFORMATION

The principal author of this notice is John B. Lovelace of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice contact Mr. Lovelace at (202) 317-7006 (not a toll-free number).


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File state tax for free Index , Hardest Hit Fund and Emergency Homeowners' Loan Programs. File state tax for free , Form 1098. File state tax for free , How To Report, Form 1098. File state tax for free A Acquisition debt, Fully deductible interest. File state tax for free , Home Acquisition Debt, Part of home not a qualified home. File state tax for free Alimony, Divorced or separated individuals. File state tax for free Amortization Points, General Rule Appraisal fees, Amounts charged for services. File state tax for free Armed forces Housing allowance, Ministers' and military housing allowance. File state tax for free Assistance (see Tax help) Average mortgage balance, Average Mortgage Balance B Borrowers More than one, More than one borrower. File state tax for free Seller-paid points, treatment by buyer, Treatment by buyer. 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File state tax for free Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. File state tax for free R Redeemable ground rents, Redeemable ground rents. File state tax for free Refinancing, Refinancing. File state tax for free Grandfathered debt, Refinanced grandfathered debt. File state tax for free Home acquisition debt, Refinanced home acquisition debt. File state tax for free Refunds, Refunds of interest. File state tax for free , Refunded interest. File state tax for free Rent Nonredeemable ground rents, Nonredeemable ground rents. File state tax for free Redeemable ground rents, Redeemable ground rents. File state tax for free Rental payments, Rental payments. File state tax for free Renting of home Part of, Renting out part of home. File state tax for free Time-sharing arrangements, Rental of time-share. File state tax for free Repairs, Substantial improvement. 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