There are times when you cannot use cost as basis. In these situations, the fair market value or the adjusted basis of property may be used. Examples are discussed next.taxmap/pubs/p225-028.htm#en_us_publink100077149
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. An example of changing property from personal to rental use would be renting out your personal residence.
If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. The basis for figuring a gain is your adjusted basis in the property when you sell the property. 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. Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis.
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.
If you receive property for services, include the property's FMV in income. The amount you include in income becomes your basis. 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.taxmap/pubs/p225-028.htm#en_us_publink100077151
George Smith is an accountant and also operates a farming business. George agreed to do some accounting work for his neighbor in exchange for a dairy cow. The accounting work and the cow are each worth $1,500. George must include $1,500 in income for his accounting services. George's basis in the cow is $1,500.taxmap/pubs/p225-028.htm#en_us_publink100077152
A taxable exchange is one in which the gain is taxable, or the loss is deductible. A taxable gain or deductible loss also is known as a recognized gain or loss. A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. 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. taxmap/pubs/p225-028.htm#en_us_publink100077153
You trade a tract of farmland with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. You must report a taxable gain of $3,000 for the land. The tractor has a basis of $6,000.taxmap/pubs/p225-028.htm#en_us_publink100077154
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.taxmap/pubs/p225-028.htm#en_us_publink100077155
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. However, make the following adjustments.
- Decrease the basis by the following amounts.
- Any loss you recognize on the involuntary conversion.
- Any money you receive that you do not spend on similar property.
- Increase the basis by the following amounts.
- Any gain you recognize on the involuntary conversion.
- Any cost of acquiring the replacement property.
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.taxmap/pubs/p225-028.htm#en_us_publink100077157
If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs.taxmap/pubs/p225-028.htm#en_us_publink100077158
Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7.
For more information about involuntary conversions, see chapter 11.taxmap/pubs/p225-028.htm#en_us_publink100077159
A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. A nontaxable gain or loss also is known as an unrecognized gain or loss. If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. taxmap/pubs/p225-028.htm#en_us_publink100077160
The exchange of property for the same kind of property is the most common type of nontaxable exchange.
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. There must also be an exchange of like-kind property. For more information, see Like-Kind Exchanges in chapter 8.taxmap/pubs/p225-028.htm#en_us_publink100077161
The basis of the property you receive generally is the same as the adjusted basis of the property you gave up.taxmap/pubs/p225-028.htm#en_us_publink100077162
You traded a truck you used in your farming business for a new smaller truck to use in farming. The adjusted basis of the old truck was $10,000. The FMV of the new truck is $14,000. 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.taxmap/pubs/p225-028.htm#en_us_publink100077163
You trade a machine (adjusted basis of $8,000) for another like-kind machine (FMV of $9,000). You use both machines in your farming business. The basis of the machine you receive is $8,000, the same as the machine traded.taxmap/pubs/p225-028.htm#en_us_publink100077164
Exchange expenses generally are the closing costs that you pay. They include such items as brokerage commissions, attorney fees, and deed preparation fees. Add them to the basis of the like-kind property you receive.taxmap/pubs/p225-028.htm#en_us_publink100077165
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.taxmap/pubs/p225-028.htm#en_us_publink100077166
You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash).taxmap/pubs/p225-028.htm#en_us_publink100077167
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. 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. Each person reports it on the tax return filed for the year in which the later disposition occurred. If this rule applies, the basis of the property received in the original exchange will be its FMV. For more information, see chapter 8.taxmap/pubs/p225-028.htm#en_us_publink100077168
Exchanging the property of one business for the property of another business generally is a multiple property exchange. For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544.taxmap/pubs/p225-028.htm#en_us_publink100077169
Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7.taxmap/pubs/p225-028.htm#en_us_publink100077170
A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments.
- Decrease the basis by the following amounts.
- Any money you receive.
- Any loss you recognize on the exchange.
- Increase the basis by the following amounts.
- Any additional costs you incur.
- Any gain you recognize on the exchange.
If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange.
You trade farmland (basis of $10,000) for another tract of farmland (FMV of $11,000) and $3,000 cash. You realize a gain of $4,000. This is the FMV of the land received plus the cash minus the basis of the land you traded ($11,000 + $3,000 − $10,000). Include your gain in income (recognize gain) only to the extent of the cash received. Your basis in the land you received is figured as follows.
|Basis of land traded||$10,000|
|Minus: Cash received (adjustment 1(a))||− 3,000|
|Plus: Gain recognized (adjustment 2(b))||+ 3,000|
|Basis of land received||$10,000|taxmap/pubs/p225-028.htm#en_us_publink100077173
You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. You realize a gain of $7,250. 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). You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Your basis in the truck you received is figured as follows.
|Adjusted basis of truck traded||$22,750|
|Minus: Cash received (adjustment 1(a))||−10,000|
|Plus: Gain recognized (adjustment 2(b))||+ 7,250|
|Basis of truck received||$20,000|
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. The rest is the basis of the like-kind property.taxmap/pubs/p225-028.htm#en_us_publink100077174
You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. You also received $1,000 cash and a truck that had an FMV of $3,000. The truck is unlike property. You realized a gain of $1,500. 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). 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. Your basis in the properties you received is figured as follows.
|Adjusted basis of old tractor||$15,000|
|Minus: Cash received (adjustment 1(a))||− 1,000|
|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). This is the truck's FMV. The rest ($12,500) is the basis of the tractor.
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.taxmap/pubs/p225-028.htm#en_us_publink100077176
You used a tractor on your farm for 3 years. Its adjusted basis is $2,000 and its FMV is $4,000. You are interested in a new tractor, which sells for $15,500. Ordinarily, you would trade your old tractor for the new one and pay the dealer $11,500. Your basis for depreciating the new tractor would then be $13,500 ($11,500 + $2,000, the adjusted basis of your old tractor). However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $15,500 for the new tractor if he will pay you $4,000 for your old tractor. Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $11,500 ($15,500 − $4,000). Your basis for depreciating the new tractor is $13,500, the same as if you traded the old tractor.taxmap/pubs/p225-028.htm#en_us_publink100077177
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. You also must know its FMV at the time it was given to you and any gift tax paid on it.taxmap/pubs/p225-028.htm#en_us_publink100077178
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. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.
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. See Adjusted Basis, earlier.
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. Figure the increase by multiplying the gift tax paid by the following fraction.
|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. 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. For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes.taxmap/pubs/p225-028.htm#en_us_publink100077179
In 2008, you received a gift of property from your mother that had an FMV of $50,000. Her adjusted basis was $20,000. The amount of the gift for gift tax purposes was $38,000 ($50,000 minus the $12,000 annual exclusion). She paid a gift tax of $7,760. Your basis, $26,130, is figured as follows.
|Fair market value||$50,000|
|Minus: Adjusted basis||−20,000|
|Net increase in value||$30,000|
|Gift tax paid||$7,760|
|Multiplied by ($30,000 ÷ $38,000)||× .79|
|Gift tax due to net increase in value||$6,130|
|Adjusted basis of property to your mother||+20,000|
|Your basis in the property||$26,130|Note.taxmap/pubs/p225-028.htm#en_us_publink100077181
If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. However, your basis cannot exceed the FMV of the gift when it was given to you.
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. Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 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. (See Adjusted Basis, earlier.)
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.taxmap/pubs/p225-028.htm#en_us_publink100077182
You received farmland as a gift from your parents when they retired from farming. At the time of the gift, the land had an FMV of $80,000. Your parents' adjusted basis was $100,000. After you received the land, no events occurred that would increase or decrease your basis.
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. 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.
If the sales price is between $80,000 and $100,000, you have neither gain nor loss. 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. If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain.taxmap/pubs/p225-028.htm#en_us_publink100077183
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.taxmap/pubs/p225-028.htm#en_us_publink100077184
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. The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. 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.
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.
For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals.taxmap/pubs/p225-028.htm#en_us_publink100077185
Your basis in property you inherit from a decedent is generally one of the following:
- The FMV of the property at the date of the decedent's death. If a federal estate return is filed, you can use its appraised value.
- The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. For information on the alternate valuation, see the Instructions for Form 706.
- 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.
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.taxmap/pubs/p225-028.htm#en_us_publink100077186
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. If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. 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. The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate.
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. 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. Figure all FMVs without regard to the special-use valuation.
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. 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. The tax also does not apply if you transfer the property to a member of your family and certain requirements are met.
You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 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. 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. The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax.
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.
For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions.taxmap/pubs/p225-028.htm#en_us_publink100077187
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.taxmap/pubs/p225-028.htm#en_us_publink100077188
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. 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. For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships.taxmap/pubs/p225-028.htm#en_us_publink100077189
The basis of property distributed by a corporation to a shareholder is its fair market value. For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations.