Publication 551
taxmap/pubs/p551-002.htm#en_us_publink1000256961There are many times when you cannot use cost as basis. In these
cases, the fair market value or the adjusted basis of property may be used.
Adjusted basis is discussed earlier.
taxmap/pubs/p551-002.htm#en_us_publink1000256962FMV is the price at which property would change hands between
a buyer and a seller, neither having to buy or sell, and both having reasonable
knowledge of all necessary facts. Sales of similar property on or about the same
date may be helpful in figuring the property's FMV.
taxmap/pubs/p551-002.htm#en_us_publink1000256963If 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/p551-002.htm#en_us_publink1000256964A bargain purchase is a purchase of an item for less than its
FMV. If, as compensation for services, you purchase goods or other property at
less than FMV, include the difference between the purchase price and the
property's FMV in your income. Your basis in the property is its FMV (your
purchase price plus the amount you include in income).
If the difference between your purchase price and the FMV represents
a qualified employee discount, do not include the difference in income. However,
your basis in the property is still its FMV. See
Employee Discounts in Publication 15-B.
taxmap/pubs/p551-002.htm#en_us_publink1000256965If you receive property for your services and the property is
subject to certain restrictions, your basis in the property is its FMV when it
becomes substantially vested unless you make the election discussed later.
Property becomes substantially vested when your rights in the property or the
rights of any person to whom you transfer the property are not subject to a
substantial risk of forfeiture.
There is substantial risk of forfeiture when the rights to full
enjoyment of the property depend on the future performance of substantial
services by any person.
When the property becomes substantially vested, include the FMV,
less any amount you paid for the property, in income.
taxmap/pubs/p551-002.htm#en_us_publink1000256966Your employer gives you stock for services performed under the
condition that you will have to return the stock unless you complete 5 years of
service. The stock is under a substantial risk of forfeiture and is not
substantially vested when you receive it. You do not report any income until you
have completed the 5 years of service that satisfy the condition.
taxmap/pubs/p551-002.htm#en_us_publink1000256967Figure the FMV of property you received without considering any
restriction except one that by its terms will never end.
taxmap/pubs/p551-002.htm#en_us_publink1000256968You received stock from your employer for services you performed.
If you want to sell the stock while you are still employed, you must sell the
stock to your employer at book value. At your retirement or death, you or your
estate must offer to sell the stock to your employer at its book value. This is
a restriction that by its terms will never end and you must consider it when you
figure the FMV.
taxmap/pubs/p551-002.htm#en_us_publink1000256969You can choose to include in your gross income the FMV of the
property at the time of transfer, less any amount you paid for it. If you make
this choice, the substantially vested rules do not apply. Your basis is the
amount you paid plus the amount you included in income.
See the discussion of
Restricted Property
in Publication 525 for more information.
taxmap/pubs/p551-002.htm#en_us_publink1000256970A taxable exchange is one in which the gain is taxable or the
loss is deductible. A taxable gain or deductible loss is also known as a
recognized gain or loss. If you receive property in exchange for other property
in a taxable exchange, the basis of property you receive is usually its FMV at
the time of the exchange. A taxable exchange occurs when you receive cash or
property not similar or related in use to the property exchanged.
taxmap/pubs/p551-002.htm#en_us_publink1000256971You trade a tract of farm land 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/p551-002.htm#en_us_publink1000256972If you receive property as a result of an involuntary conversion,
such as a casualty, theft, or condemnation, you can figure the basis of the
replacement property you receive using the basis of the converted property.
taxmap/pubs/p551-002.htm#en_us_publink1000256973If you receive replacement property similar or related in service
or use to the converted property, the replacement property's basis is the old
property's basis on the date of the conversion. However, make the following
adjustments.
- Decrease the basis by the following.
- Any loss you recognize on the conversion, and
- Any money you receive that you do not spend on similar property.
- Increase the basis by the following.
- Any gain you recognize on the conversion, and
- 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 new
property is its cost decreased by the gain not recognized on the conversion.
taxmap/pubs/p551-002.htm#en_us_publink1000256975The state condemned your property. The property had an adjusted
basis of $26,000 and the state paid you $31,000 for it. You realized a gain of
$5,000 ($31,000 − $26,000). You bought replacement property similar in use
to the converted property for $29,000. You recognize a gain of $2,000 ($31,000
− $29,000), the unspent part of the payment from the state. Your gain not
recognized is $3,000, the difference between the $5,000 realized gain and the
$2,000 recognized gain. The basis of the new property is figured as follows:
| Cost of replacement property | $29,000 |
| Minus: Gain not recognized | 3,000 |
| Basis of the replacement property | $26,000 |
If you buy more than one piece of replacement property, allocate
your basis among the properties based on their respective costs.
taxmap/pubs/p551-002.htm#en_us_publink1000256978The state in the previous example condemned your unimproved real
property and the replacement property you bought was improved real property with
both land and buildings. Allocate the replacement property's $26,000 basis
between land and buildings based on their respective costs.
taxmap/pubs/p551-002.htm#en_us_publink1000256979For more information about condemnations, see
Involuntary Conversions
in Publication 544. For more information about casualty and
theft losses, see Publication 547.
taxmap/pubs/p551-002.htm#en_us_publink1000256980Words you may need to know (see Glossary)
- Intangible property
- Like-kind property
- Personal property
- Real property
- Tangible property
A nontaxable exchange is an exchange in which you are not taxed
on any gain and you cannot deduct any loss. If you receive property in a
nontaxable exchange, its basis is usually the same as the basis of the property
you transferred. A nontaxable gain or loss is also known as an unrecognized gain
or loss.
taxmap/pubs/p551-002.htm#en_us_publink1000256981The exchange of property for the same kind of property is the
most common type of nontaxable 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 Publication 544.
The basis of the property you receive is the same as the basis
of the property you gave up.
taxmap/pubs/p551-002.htm#en_us_publink1000256982You exchange real estate (adjusted basis $50,000, FMV $80,000)
held for investment for other real estate (FMV $80,000) held for investment.
Your basis in the new property is the same as the basis of the old ($50,000).
taxmap/pubs/p551-002.htm#en_us_publink1000256983Exchange expenses are generally the closing costs you pay. They
include such items as brokerage commissions, attorney fees, deed preparation
fees, etc. Add them to the basis of the like-kind property received.
taxmap/pubs/p551-002.htm#en_us_publink1000256984If you trade property in a like-kind exchange and also pay money,
the basis of the property received is the basis of the property you gave up
increased by the money you paid.
taxmap/pubs/p551-002.htm#en_us_publink1000256985You trade in a truck (adjusted basis $3,000) for another truck
(FMV $7,500) and pay $4,000. Your basis in the new truck is $7,000 (the $3,000
basis of the old truck plus the $4,000 paid).
taxmap/pubs/p551-002.htm#en_us_publink1000256986If 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. Each person reports it on the tax return filed for the year in which
the later disposition occurs. If this rule applies, the basis of the property
received in the original exchange will be its fair market value.
These rules generally do not apply to the following kinds of
property dispositions.
- Dispositions due to the death of either related person,
- Involuntary conversions, and
- Dispositions in which neither the original exchange nor the
subsequent disposition had as a main purpose the avoidance of federal income
tax.
Generally, related persons are ancestors, lineal descendants,
brothers and sisters (whole or half), and a spouse.
For other related persons (for example, two corporations, an
individual and a corporation, a grantor and fiduciary, etc.), see
Nondeductible Loss
in chapter 2 of Publication 544.
taxmap/pubs/p551-002.htm#en_us_publink1000256988Exchanging the assets of one business for the assets of another
business is a multiple property exchange. For information on figuring basis, see
Multiple Property Exchanges
in chapter 1 of Publication 544.
taxmap/pubs/p551-002.htm#en_us_publink1000256989A partially nontaxable exchange is an exchange in which you receive
unlike property or money in addition to like property. The basis of the property
you receive is the same as the basis of the property you gave up, with the
following adjustments.
- Decrease the basis by the following amounts.
- Any money you receive, and
- Any loss you recognize on the exchange.
- Increase the basis by the following amounts.
- Any additional costs you incur, and
- 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.
taxmap/pubs/p551-002.htm#en_us_publink1000256990You traded a truck (adjusted basis $6,000) for a new truck (FMV
$5,200) and $1,000 cash. You realized a gain of $200 ($6,200 − $6,000).
This is the FMV of the truck received plus the cash minus the adjusted basis of
the truck you traded ($5,200 + $1,000 – $6,000). You include all the gain
in income (recognized gain) because the gain is less than the cash received.
Your basis in the new truck is:
| Adjusted basis of old truck | $6,000 |
| Minus: Cash received (adjustment 1(a)) | 1,000 |
| | $5,000 |
| Plus: Gain recognized (adjustment 2(b)) | 200 |
| Basis of new truck | $5,200 |
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
property.
taxmap/pubs/p551-002.htm#en_us_publink1000256993You had an adjusted basis of $15,000 in real estate you held
for investment. You exchanged it for other real estate to be held for investment
with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. The
truck is unlike property. You realized a gain of $1,500 ($16,500 −
$15,000). This is the FMV of the real estate received plus the FMV of the truck
received plus the cash
minus
the adjusted basis of the real estate 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 real estate transferred | $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 real estate.
taxmap/pubs/p551-002.htm#en_us_publink1000256995If 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/p551-002.htm#en_us_publink1000256996You are a salesperson and you use one of your cars 100% for business.
You have used this car in your sales activities for 2 years and have depreciated
it. Your adjusted basis in the car is $22,600 and its FMV is $23,100. You are
interested in a new car, which sells for $28,000. If you trade your old car and
pay $4,900 for the new one, your basis for depreciation for the new car would be
$27,500 ($4,900 plus the $22,600 basis of your old car). However, you want a
higher basis for depreciating the new car, so you agree to pay the dealer
$28,000 for the new car if he will pay you $23,100 for your old car. Because the
two transactions are dependent on each other, you are treated as having
exchanged your old car for the new one and paid $4,900 ($28,000 −
$23,100). Your basis for depreciating the new car is $27,500, the same as if you
traded the old car.
taxmap/pubs/p551-002.htm#en_us_publink1000256997If you have property used partly for business and partly for
personal use, and you exchange it in a nontaxable exchange for property to be
used wholly or partly in your business, the basis of the property you receive is
figured as if you had exchanged two properties. The first is an exchange of
like-kind property. The second is personal-use property on which gain is
recognized and loss is not recognized.
First, figure your adjusted basis in the property as if you transferred
two separate properties. Figure the adjusted basis of each part of the property
by taking into account any adjustments to basis. Deduct the depreciation you
took or could have taken from the adjusted basis of the business part. Then
figure the amount realized for your property and allocate it to the business and
nonbusiness parts of the property.
The business part of the property is permitted to be exchanged
tax free. However, you must recognize any gain from the exchange of the
nonbusiness part. You are deemed to have received, in exchange for the
nonbusiness part, an amount equal to its FMV on the date of the exchange. The
basis of the property you acquired is the total basis of the property
transferred (adjusted to the date of the exchange), increased by any gain
recognized on the nonbusiness part.
 | If the nonbusiness part of the property transferred is your
main home, you may qualify to exclude from income all or part of the gain on
that part. For more information, see Publication 523. |
taxmap/pubs/p551-002.htm#en_us_publink1000256999If you trade in a car you used partly in your business for another
car you will use in your business, your basis for depreciation of the new car is
not the same as your basis for figuring a gain or loss on its sale.
For information on figuring your basis for depreciation, see
Publication 463.
taxmap/pubs/p551-002.htm#en_us_publink1000257000The basis of property transferred to you or transferred in trust
for your benefit by your spouse (or former spouse if the transfer is incident to
divorce), is the same as your spouse's adjusted basis. However, adjust your
basis for any gain recognized by your spouse or former spouse on property
transferred in trust. This rule applies only to a transfer of property in trust
in which the liabilities assumed, plus the liabilities to which the property is
subject, are more than the adjusted basis of the property transferred.
If the property transferred to you is a series E, series EE,
or series I United States savings bond, the transferor must include in income
the interest accrued to the date of transfer. Your basis in the bond immediately
after the transfer is equal to the transferor's basis increased by the interest
income includible in the transferor's income. For more information on these
bonds, see Publication 550.
At the time of the transfer, the transferor must give you the
records necessary to determine the adjusted basis and holding period of the
property as of the date of transfer.
For more information, see Publication 504, Divorced or Separated
Individuals.
taxmap/pubs/p551-002.htm#en_us_publink1000257001To 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, its FMV at the time it was given to you, and any gift tax paid on it.
taxmap/pubs/p551-002.htm#en_us_publink1000257002If 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 same
as the donor's adjusted basis plus or minus any required adjustment 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 adjustment 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 have a gain, you have
neither gain nor loss on the sale or disposition of the property.
taxmap/pubs/p551-002.htm#en_us_publink1000257003You received an acre of land as a gift. At the time of the gift,
the land had an FMV of $8,000. The donor's adjusted basis was $10,000. After you
received the land, no events occurred to increase or decrease your basis. If you
sell the land for $12,000, you will have a $2,000 gain because you must use the
donor's adjusted basis ($10,000) at the time of the gift as your basis to figure
gain. If you sell the land for $7,000, you will have a $1,000 loss because you
must use the FMV ($8,000) at the time of the gift as your basis to figure a
loss.
If the sales price is between $8,000 and $10,000, you have neither
gain nor loss. For instance, if the sales price was $9,000 and you tried to
figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000
loss. If you then tried to figure a loss using the FMV ($8,000), you would get a
$1,000 gain.
taxmap/pubs/p551-002.htm#en_us_publink1000257004If you hold the gift as business property, your basis for figuring
any depreciation, depletion, or amortization deduction is the same as the
donor's adjusted basis plus or minus any required adjustments to basis while you
hold the property.
taxmap/pubs/p551-002.htm#en_us_publink1000257005If the FMV of the property is equal to or greater than the donor's
adjusted basis, your basis is the donor's adjusted basis at the time 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 by any
required adjustments to basis while you held the property. See
Adjusted Basis
earlier.
taxmap/pubs/p551-002.htm#en_us_publink1000257006If you received a gift before 1977, increase your basis in the
gift (the donor's adjusted basis) by any gift tax paid on it. However, do not
increase your basis above the FMV of the gift at the time it was given to you.
taxmap/pubs/p551-002.htm#en_us_publink1000257007Example 1.(p9)
You were given a house in 1976 with an FMV of $21,000. The donor's
adjusted basis was $20,000. The donor paid a gift tax of $500. Your basis is
$20,500, the donor's adjusted basis plus the gift tax paid.
taxmap/pubs/p551-002.htm#en_us_publink1000257008Example 2.(p9)
If, in Example 1, the gift tax paid had been $1,500, your basis
would be $21,000. This is the donor's adjusted basis plus the gift tax paid,
limited to the FMV of the house at the time you received the gift.
taxmap/pubs/p551-002.htm#en_us_publink1000257009If you received a gift after 1976, increase your basis in the
gift (the donor's adjusted basis) by the part of the gift tax paid on it that is
due to the net increase in value of the gift. Figure the increase by multiplying
the gift tax paid by a fraction. The numerator of the fraction is the net
increase in value of the gift and the denominator is the amount of the gift.
The net increase in value of the gift is the FMV of the gift
less 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/p551-002.htm#en_us_publink1000257010In 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 $9,000. Your basis, $27,290, is figured as follows:
| Fair market value | $50,000 |
| Minus: Adjusted basis | 20,000 |
| Net increase in value | $30,000 |
| Gift tax paid | $9,000 |
| Multiplied by ($30,000 ÷ $37,000) | .81 |
| Gift tax due to net increase in value | $7,290 |
| Adjusted basis of property to your mother | 20,000 |
| Your basis in the property | $27,290 |
 | Special rules apply to property acquired from a decedent
who died in 2010. See Publication 4895, Tax Treatment of Property Acquired From
a Decedent Dying in 2010, for details. |
If you inherited property from a decedent who died before 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 individual's death.
- The FMV on the alternate valuation date if the personal representative
for the estate chooses to use alternate valuation. For information on the
alternate valuation date, see the Instructions for Form 706.
- The value under the special-use valuation method for real
property used in farming or a closely held business if chosen for estate tax
purposes. This method is discussed later.
- The decedent's adjusted basis in land to the extent of the
value excluded from the decedent's taxable estate as a qualified conservation
easement. For information on a qualified conservation easement, see the
Instructions for Form 706.
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.
For more information, see the Instructions for Form 706.
taxmap/pubs/p551-002.htm#en_us_publink1000257013The above rule does not apply to appreciated property you receive
from a decedent if you or your spouse originally gave the property to the
decedent within 1 year before the decedent's death. Your basis in this property
is the same as the decedent's adjusted basis in the property immediately before
his or her death, rather than its FMV. Appreciated property is any property
whose FMV on the day it was given to the decedent is more than its adjusted
basis.
taxmap/pubs/p551-002.htm#en_us_publink1000257014In community property states (Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each
usually considered to own half the community property. When either spouse dies,
the total value of the community property, even the part belonging to the
surviving spouse, generally becomes the basis of the entire property. For this
rule to apply, at least half the value of the community property interest must
be includable in the decedent's gross estate, whether or not the estate must
file a return.
For example, you and your spouse owned community property that
had a basis of $80,000. When your spouse died, half the FMV of the community
interest was includible in your spouse's estate. The FMV of the community
interest was $100,000. The basis of your half of the property after the death of
your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half
to your spouse's heirs is also $50,000.
For more information on community property, see Publication 555,
Community Property.
taxmap/pubs/p551-002.htm#en_us_publink1000257015The following example explains the rule for the basis of property
held by a surviving tenant in joint tenancy or tenancy by the entirety.
taxmap/pubs/p551-002.htm#en_us_publink1000257016John and Jim owned, as joint tenants with right of survivorship,
business property they purchased for $30,000. John furnished two-thirds of the
purchase price and Jim furnished one-third. Depreciation deductions allowed
before John's death were $12,000. Under local law, each had a half interest in
the income from the property. At the date of John's death, the property had an
FMV of $60,000, two-thirds of which is includable in John's estate. Jim figures
his basis in the property at the date of John's death as follows:
| Interest Jim bought with his own funds—1/3 of $30,000 cost
| $10,000 | |
| Interest Jim received on John's death—2/3 of $60,000 FMV
| 40,000 | $50,000 |
| Minus:
1/2 of $12,000 depreciation before John's death
| 6,000 |
| Jim's basis at the date of John's death | $44,000 |
If Jim had not contributed any part of the purchase price, his
basis at the date of John's death would be $54,000. This is figured by
subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's
half interest before the date of death.
If under local law Jim had no interest in the income from the
property and he contributed no part of the purchase price, his basis at John's
death would be $60,000, the FMV of the property.
taxmap/pubs/p551-002.htm#en_us_publink1000257018Include one-half of the value of a qualified joint interest in
the decedent's gross estate. It does not matter how much each spouse contributed
to the purchase price. Also, it does not matter which spouse dies first.
A qualified joint interest is any interest in property held by
husband and wife as either of the following.
- Tenants by the entirety, or
- Joint tenants with right of survivorship if husband and wife
are the only joint tenants.
As the surviving spouse, your basis in property you owned with
your spouse as a qualified joint interest is the cost of your half of the
property with certain adjustments. Decrease the cost by any deductions allowed
to you for depreciation and depletion. Increase the reduced cost by your basis
in the half you inherited.
taxmap/pubs/p551-002.htm#en_us_publink1000257020Under certain conditions, when a person dies the executor or
personal representative of that person's estate can choose to value the
qualified real property on other than its FMV. If so, the executor or personal
representative values the qualified real property based on its use as a farm or
its use in a closely held business. If the executor or personal representative
chooses this method of valuation for estate tax purposes, that value is the
basis of the property for the heirs. Qualified heirs should be able to get the
necessary value from the executor or personal representative of the estate.
taxmap/pubs/p551-002.htm#en_us_publink1000257021If you are a qualified heir who received special-use valuation
property, your basis in the property is the estate's or trust's basis in that
property immediately before the distribution. 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 the alternate
valuation date. Figure all FMVs without regard to the special-use valuation.
You can elect to increase your basis in special-use valuation
property if it becomes subject to the additional estate tax. This tax is
assessed if, within 10 years after the death of the decedent, you transfer the
property to a person who is not a member of your family or the property stops
being used as a farm or in a closely held business.
To increase your basis in the property, 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 the 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 results in the additional estate tax.
You make the election by filing with Form 706-A a statement that
does all of the following.
- Contains your name, address, and taxpayer identification number
and those of the estate;
- Identifies the election as an election under section 1016(c)
of the Internal Revenue Code;
- Specifies the property for which the election is made; and
- Provides any additional information required by the Instructions
for Form 706-A.
For more information, see the Instructions for Form 706 and the
Instructions for Form 706-A.
taxmap/pubs/p551-002.htm#en_us_publink1000257022If 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 held for personal use to business use would be
renting out your former main home.
taxmap/pubs/p551-002.htm#en_us_publink1000257023The basis for depreciation is the lesser of the following amounts.
- The FMV of the property on the date of the change, or
- Your adjusted basis on the date of the change.
Several years ago you paid $160,000 to have your home built on
a lot that cost $25,000. You paid $20,000 for permanent improvements to the
house and claimed a $2,000 casualty loss deduction for damage to the house
before changing the property to rental use last year. Because land is not
depreciable, you include only the cost of the house when figuring the basis for
depreciation.
Your adjusted basis in the house when you changed its use was
$178,000 ($160,000 + $20,000 − $2,000). On the same date, your property
had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for
the house. The basis for figuring depreciation on the house is its FMV on the
date of change ($165,000) because it is less than your adjusted basis
($178,000).
taxmap/pubs/p551-002.htm#en_us_publink1000257025If you later sell or dispose of property changed to business
or rental use, the basis of the property you use will depend on whether you are
figuring gain or loss.
taxmap/pubs/p551-002.htm#en_us_publink1000257026The basis for figuring a gain is your adjusted basis when you
sell the property.
taxmap/pubs/p551-002.htm#en_us_publink1000257027Assume the same facts as in the previous example except that
you sell the property at a gain after being allowed depreciation deductions of
$37,500. Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000
(land) − $37,500).
taxmap/pubs/p551-002.htm#en_us_publink1000257028Figure 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 adjust this amount for the period after the change in the
property's use, as discussed earlier under
Adjusted Basis, to arrive at a basis for loss.
taxmap/pubs/p551-002.htm#en_us_publink1000257029Assume the same facts as in the previous example, except that
you sell the property at a loss after being allowed depreciation deductions of
$37,500. In this case, you would start with the FMV on the date of the change to
rental use ($180,000) because it is less than the adjusted basis of $203,000
($178,000 + $25,000) on that date. Reduce that amount ($180,000) by the
depreciation deductions to arrive at a basis for loss of $142,500 ($180,000
− $37,500).
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