Publication 225
taxmap/pubs/p225-028.htm#en_us_publink1000218080There 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_publink1000218081When 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_publink1000218083George 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_publink1000218084A 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_publink1000218085You 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_publink1000218086If 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_publink1000218087If 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_publink1000218089If 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_publink1000218090For more information about involuntary conversions, see
chapter 11.
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_publink1000218092The 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.
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_publink1000218094You 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_publink1000218095You 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_publink1000218096Exchange 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_publink1000218097If 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_publink1000218098You 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_publink1000218099If 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.
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_publink1000218101taxmap/pubs/p225-028.htm#en_us_publink1000218102A 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 |
| | $7,000 |
| Plus: Gain recognized (adjustment 2(b)) | + 3,000 |
| Basis of land received | $10,000 |
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 |
| | $12,750 |
| 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_publink1000218108You 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 |
| | $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). 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_publink1000218111You 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_publink1000218112To 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_publink1000218113If 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_publink1000218115In 2010, 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 $37,000 ($50,000 minus the $13,000 annual exclusion).
She paid a gift tax of $7,540. Your basis, $26,107, is figured as follows.
| Fair market value | $50,000 |
| Minus: Adjusted basis | −20,000 |
| Net increase in value | $30,000 |
| Gift tax paid | $7,540 |
| Multiplied by ($30,000 ÷ $37,000) | × .81 |
| Gift tax due to net increase in value | $6,107 |
| Adjusted basis of property to your mother | +20,000 |
| Your basis in the property | $26,107 |
Note.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.
taxmap/pubs/p225-028.htm#en_us_publink1000218118If 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_publink1000218119You 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_publink1000218120If 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_publink1000218121The 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_publink1000218122If you inherited property from a decedent who died before January
1, 2010, 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_publink1000251107Under 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_publink1000251108If you inherited property from a decedent who died in 2010, different
rules may apply. For more information, see IRS.gov or consult your tax advisor.
taxmap/pubs/p225-028.htm#en_us_publink1000218124The 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_publink1000218125Unless 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_publink1000218126The 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.
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