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 of the property.taxmap/pubs/p225-027.htm#en_us_publink1000218070
Increase the basis of any property by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year.
The following costs increase the basis of property.
- The cost of extending utility service lines to property.
- Legal fees, such as the cost of defending and perfecting title.
- Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements.
- Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Do not deduct these expenses as taxes. However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements.
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. See chapter 7
Do not add to your basis costs you can deduct as current expenses. For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. However, you can elect either to deduct or to capitalize certain other costs. See chapter 7 in Publication 535.taxmap/pubs/p225-027.htm#en_us_publink1000218072
The following are some items that reduce the basis of property.
- Section 179 deduction.
- Deductions previously allowed or allowable for amortization, depreciation, and depletion.
- Alternative motor vehicle credit. See Form 8910.
- Alternative fuel vehicle refueling property credit. See Form 8911.
- Residential energy efficient property credits. See Form 5695.
- Investment credit (part or all) taken.
- Casualty and theft losses and insurance reimbursements.
- Payments you receive for granting an easement.
- Exclusion from income of subsidies for energy conservation measures.
- Certain canceled debt excluded from income.
- Rebates from a manufacturer or seller.
- Patronage dividends received from a cooperative association as a result of a purchase of property. See Patronage Dividends in chapter 3.
- Gas-guzzler tax. See Form 6197.
Some of these items are discussed next. For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551.
The adjustments you must make to the basis of property if you take the section 179 deduction or depreciate the property are explained next. For more information on these deductions, see chapter 7
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. taxmap/pubs/p225-027.htm#en_us_publink1000218075
Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns (allowed or allowable depreciation), under the method of depreciation you chose. If you took less depreciation than you could have or you did not take a depreciation deduction, reduce the basis by the full amount of depreciation you could have taken. 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.
See chapter 7
for information on figuring the depreciation you should have claimed.
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.taxmap/pubs/p225-027.htm#en_us_publink1000218076
If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Also, decrease it by any deductible loss not covered by insurance. See chapter 11
for information about figuring your casualty or theft loss.
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. To make this determination, compare the repaired property to the property before the casualty. taxmap/pubs/p225-027.htm#en_us_publink1000218077
The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the 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. See Easements and rights-of-way
in chapter 3
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 by the excluded amount.taxmap/pubs/p225-027.htm#en_us_publink1000218079
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. A debt includes any indebtedness for which you are liable or which attaches to property you hold.
You can exclude your canceled debt from income if the debt is any of the following.
- Debt canceled in a bankruptcy case or when you are insolvent.
- Qualified farm debt.
- Qualified real property business debt (provided you are not a C corporation).
- Qualified principal residence indebtedness.
- Discharge of certain indebtedness of a qualified individual because of Midwestern disasters.
If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount.
For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3
. For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.