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