Your basis is the amount of your investment in property for tax purposes. Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Also use basis to figure depreciation, amortization, depletion, and casualty losses. If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Only the basis allocated to the business or investment use of the property can be depreciated.
Your original basis in property is adjusted (increased or decreased) by certain events. For example, if you make improvements to the property, increase your basis. If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis.
Keep accurate records of all items that affect the basis of your assets. For information on keeping records, see chapter 1
You may want to see:
Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property taxmap/pubs/p225-026.htm#en_us_publink1000218040
See chapter 16
for information about getting publications and forms.
The basis of property you buy is usually its cost. Cost is the amount you pay in cash, debt obligations, other property, or services. Your cost includes amounts you pay for sales tax, freight, installation, and testing. The basis of real estate and business assets will include other items. Basis generally does not include interest payments. However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535.
You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. taxmap/pubs/p225-026.htm#en_us_publink1000218041
If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. You generally have unstated interest if your interest rate is less than the applicable federal rate. See the discussion of unstated interest in Publication 537, Installment Sales. taxmap/pubs/p225-026.htm#en_us_publink1000218042
Real property, also called real estate, is land and generally anything built on, growing on, or attached to land.
If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Some of these expenses are discussed next.taxmap/pubs/p225-026.htm#en_us_publink1000218043
If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Figure the basis of each asset by multiplying the lump sum by a fraction. The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase.taxmap/pubs/p225-026.htm#en_us_publink1000218044
FMV is the price at which property would change hands between a willing buyer and a willing 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 help in figuring the FMV of the property.
If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes.
If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis.
If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Whether or not you reimburse the seller, do not include that amount in the basis of your property. taxmap/pubs/p225-026.htm#en_us_publink1000218047
Your basis includes the settlement fees and closing costs for buying the property. See Publication 551 for a detailed list of items you can and cannot include in basis.
Do not include fees and costs for getting a loan on the property. Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance.taxmap/pubs/p225-026.htm#en_us_publink1000218048
If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. You may be able to deduct the points currently or over the term of the loan. For more information about deducting points, see Points in chapter 4 of Publication 535. taxmap/pubs/p225-026.htm#en_us_publink1000218049
If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. taxmap/pubs/p225-026.htm#en_us_publink1000218050
If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000.taxmap/pubs/p225-026.htm#en_us_publink1000218051
If you build property or have assets built for you, your expenses for this construction are part of your basis. Some of these expenses include the following costs:
- Labor and materials,
- Architect's fees,
- Building permit charges,
- Payments to contractors,
- Payments for rental equipment, and
- Inspection fees.
In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. You must capitalize them (include them in the asset's basis).
- Employee wages paid for the construction work, reduced by any employment credits allowed.
- Depreciation on equipment you own while it is used in the construction.
- Operating and maintenance costs for equipment used in the construction.
- Business supplies and materials used in the construction.
Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct.
In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. To determine the basis of these assets or separate items, there must be an allocation of basis.taxmap/pubs/p225-026.htm#en_us_publink1000218054
If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. taxmap/pubs/p225-026.htm#en_us_publink1000218055
If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Generally, reduce the purchase price by any cash received. Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information.taxmap/pubs/p225-026.htm#en_us_publink1000218056
If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Allocate the rest of the purchase price to the basis of the calf. Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense.taxmap/pubs/p225-026.htm#en_us_publink1000218057
Certain areas of the country have quotas or allotments for commodities such as milk, tobacco, and peanuts. The cost of the quota or allotment is its basis. If you acquire a right to a quota with the purchase of land or a herd of dairy cows, allocate part of the purchase price to that right based on its FMV and the FMV of the land or herd.taxmap/pubs/p225-026.htm#en_us_publink1000218058
Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.
Generally, you are subject to the uniform capitalization rules if you do any of the following:
- Produce real or tangible personal property, or
- Acquire property for resale. However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less.
You produce property if you construct, build, install, manufacture, develop, improve, or create the property.
You are not subject to the uniform capitalization rules if the property is produced for personal use.
In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals.taxmap/pubs/p225-026.htm#en_us_publink1000218060
A plant produced in a farming business includes the following items:
- A fruit, nut, or other crop-bearing tree;
- An ornamental tree;
- A vine;
- A bush;
- Sod; and
- The crop or yield of a plant that will have more than one crop or yield.
An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life.
The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding.taxmap/pubs/p225-026.htm#en_us_publink1000218062
In a farming business, the uniform capitalization rules do not apply to:
- Any animal,
- Any plant with a preproductive period of 2 years or less, or
- Any costs of replanting certain plants lost or damaged due to casualty.
In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. If you make this election, special rules apply. This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted.
If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect.
You grow trees that have a preproductive period of more than 2 years. The trees produce an annual crop. You are an individual and the uniform capitalization rules apply to your farming business. You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. taxmap/pubs/p225-026.htm#en_us_publink1000218065
The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Plants producing the crops or yields shown in Table 6-1
have a nationwide weighted average preproductive period of more than 2 years. Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years.
For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1.263A-4.
Table 6-1. Plants With a Preproductive Period of More Than 2 Years
| Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. |
- Coffee beans
- Macadamia nuts
- Pistachio nuts