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taxmap/pub17/p17-077.htm#en_us_publink1000172166

Adjusted Basis(p97)


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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 (increases and decreases) to the cost of the property. The result is the adjusted basis.
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Increases to Basis(p97)


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Increase the basis of any property by all items properly added to a capital account. Examples of items that increase basis are shown in Table 13-1. These include the items discussed below.
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Improvements.(p97)


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Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway.
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Assessments for local improvements.(p97)
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Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Do not deduct them as taxes. However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements.
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Example.(p97)

Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Add the assessment to your property's basis. In this example, the assessment is a depreciable asset.
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Decreases to Basis(p97)


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Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Examples of items that decrease basis are shown in Table 13-1. These include the items discussed below.
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Table 13-1. Examples of Adjustments to Basis

Increases to Basis Decreases to Basis
• Capital improvements:• Exclusion from income of
 Putting an addition on your home  subsidies for energy conservation
 Replacing an entire roof  measures
 Paving your driveway 
 Installing central air conditioning• Casualty or theft loss deductions
 Rewiring your home  and insurance reimbursements
   
• Assessments for local improvements: 
 Water connections 
 Extending utility service lines to the
 property
• Postponed gain from the sale of a home
 Sidewalks• Alternative motor vehicle credit
 (Form 8910)
 Roads 
  • Alternative fuel vehicle refueling
   property credit (Form 8911)
   
  • Residential energy credits (Form 5695)
   
• Casualty losses:• Depreciation and section 179 deduction
 Restoring damaged property 
 • Nontaxable corporate distributions
• Legal fees: 
 Cost of defending and perfecting a title• Certain canceled debt excluded from
 Fees for getting a reduction of an assessment  income
  
• Zoning costs• Easements
   
  • Adoption tax benefits
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Casualty and theft losses.(p97)


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If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance.
You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition.
For more information on casualty and theft losses, see chapter 25.
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Depreciation and section 179 deduction.(p97)


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Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected.
For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562.
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Example.(p97)

You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. You added an improvement to the duplex that cost $10,000. In February last year, the duplex was damaged by fire. Up to that time, you had been allowed depreciation of $23,000. You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. You deducted a casualty loss of $1,000 on your income tax return for last year. You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Figure the adjusted basis of the duplex as follows:
Original cost of duplex$35,000
Addition to duplex 10,000
Total cost of duplex$45,000
Minus:Depreciation 23,000
Adjusted basis before casualty$22,000
Minus:Insurance proceeds$19,700 
 Deducted casualty loss1,000 
 Salvage proceeds 1,300 22,000
Adjusted basis after casualty$-0-
Add: Cost of restoring duplex 19,000
Adjusted basis after restoration $19,000
Note.Your basis in the land is its original cost of $5,000.
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Easements.(p98)


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The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. It reduces the basis of the affected part of the property. 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.
If the gain is on a capital asset, see chapter 16 for information about how to report it. If the gain is on property used in a trade or business, see Publication 544 for information about how to report it.
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Exclusion of subsidies for energy conservation measures.(p98)


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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. Reduce the basis of the property for which you received the subsidy by the excluded amount. For more information about this subsidy, see chapter 12.
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Postponed gain from sale of home.(p98)


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If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. For more information on the rules for the sale of a home, see chapter 15.