- Publication 551 - Introductory Material
- Publication 551 - Main Content
- Cost Basis
- Loans with low or no interest.
- Purchase of a business.
- Stocks and Bonds
- Real Property
- Business Assets
- Allocating the Basis
- Adjusted Basis
- Increases to Basis
- Decreases to Basis
- Casualties and Thefts
- Vehicle Credits
- Gas-Guzzler Tax
- Section 179 Deduction
- Exclusion of Subsidies for Energy Conservation Measures
- Canceled Debt Excluded From Income
- Postponed Gain From Sale of Home
- Adoption Tax Benefits
- Employer-Provided Child Care
- Disposition of a Portion of MACRS Property
- Adjustments to Basis Examples
- Basis Other Than Cost
- Fair market value (FMV).
- Property Received for Services
- Taxable Exchanges
- Nontaxable Exchanges
- Property Transferred From a Spouse
- Property Received as a Gift
- Inherited Property
- Property Changed to Business or Rental Use
- How To Get Tax Help
- Tax reform.
- Preparing and filing your tax return.
- Getting tax forms and publications.
- Access your online account (individual taxpayers only).
- Using direct deposit.
- Refund timing for returns claiming certain credits.
- Getting a transcript or copy of a return.
- Using online tools to help prepare your return.
- Resolving tax-related identity theft issues.
- Checking on the status of your refund.
- Making a tax payment.
- What if I cant pay now?
- Checking the status of an amended return.
- Understanding an IRS notice or letter.
- Contacting your local IRS office.
- Watching IRS videos.
- Getting tax information in other languages.
- The Taxpayer Advocate Service (TAS) Is Here To Help You
- Low Income Taxpayer Clinics (LITCs)
- Cost Basis
- Publication 551 - Additional Material
For the latest information about developments related to Pub. 551, such as legislation enacted after this publication was published, go to IRS.gov/Pub551.
Uniform capitalization rules. Beginning in 2018, small businesses are not subject to the uniform capitalization rules if the average annual gross receipts are $25 million or less for the 3 preceding tax years and the business isn't a tax shelter. See Uniform Capitalization Rules , later.
Like-kind exchanges. Beginning after December 31, 2017, section 1031 like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale. Certain exchanges of personal or intangible property started in 2017 and completed in 2018 may qualify as a like-kind exchange. See Like-Kind Exchanges , later.
Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
Basis is the amount of your investment in property for tax purposes. Use the basis of property to figure depreciation, amortization, depletion, and casualty losses. Also use it to figure gain or loss on the sale or other disposition of property. You must keep accurate records of all items that affect the basis of property so you can make these computations.
This publication is divided into the following sections.
Basis Other Than Cost
The basis of property you buy is usually its cost. You may also have to capitalize (add to basis) certain other costs related to buying or producing the property.
Your original basis in property is adjusted (increased or decreased) by certain events. If you make improvements to the property, increase your basis. If you take deductions for depreciation or casualty losses, reduce your basis.
You can't determine your basis in some assets by cost. This includes property you receive as a gift or inheritance. It also applies to property received in an involuntary conversion and certain other circumstances.
463 Travel, Gift, and Car Expenses
523 Selling Your Home
525 Taxable and Nontaxable Income
527 Residential Rental Property
530 Tax Information for Homeowners
535 Business Expenses
537 Installment Sales
544 Sales and Other Dispositions of Assets
547 Casualties, Disasters, and Thefts
550 Investment Income and Expenses
559 Survivors, Executors, and Administrators
587 Business Use of Your Home
946 How To Depreciate Property
Form (and Instructions)
706 United States Estate (and Generation-Skipping Transfer) Tax Return
706-A United States Additional Estate Tax Return
8594 Asset Acquisition Statement
See How To Get Tax Help near the end of this publication for information about getting publications and forms.
The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items.
Installation and testing.
Legal and accounting fees (when they must be capitalized).
Real estate taxes (if assumed for the seller).
You may also have to capitalize (add to basis) certain other costs related to buying or producing property.
The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock.
You must adjust the basis of stocks for certain events that occur after purchase. See Stocks and Bonds in chapter 4 of Pub. 550 for more information on the basis of stock.
Real property, also called real estate, is land and generally anything built on or attached to it. If you buy real property, certain fees and other expenses become part of your cost basis in the property.
If you purchase property to use in your business, your basis is usually its actual cost to you. If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. In certain circumstances, you may be subject to the uniform capitalization rules (discussed next).
The uniform capitalization rules specify the costs you add to basis in certain circumstances.
Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. The basis of an intangible asset is usually the cost to buy or create it. If you acquire multiple assets, for example, an ongoing business for a lump sum, see Allocating the Basis , later, to figure the basis of the individual assets. The basis of certain intangibles can be amortized. See chapter 8 of Pub. 535 for information on the amortization of these costs.
If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. See Trade or Business Acquired below.
If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. 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. However, see Trade or Business Acquired next.
If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value (FMV) in the following order.
Certificates of deposit, U.S. government securities, foreign currency, and actively traded personal property, including stock and securities.
Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes.
Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business.
All other assets except section 197 intangibles, goodwill, and going concern value.
Section 197 intangibles except goodwill and going concern value.
Goodwill and going concern value (whether or not they qualify as section 197 intangibles).
If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings.
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. If you're not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes.
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 to the basis of the property. The result of these adjustments to the basis is the adjusted basis.
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.
Rehabilitation expenses also increase basis. However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. If you have to recapture any of the credit, increase your basis by the recaptured amount.
If you make additions or improvements to business property, keep separate accounts for them. Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. For more information, see Pub. 946.
The following items increase the basis of property.
The cost of extending utility service lines to the property.
Legal fees, such as the cost of defending and perfecting title.
Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements.
The capitalized value of a redeemable ground rent.
Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Don't deduct them as taxes. However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements.
Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. Add the assessment to your property's basis. In this example, the assessment is a depreciable asset.
Don't add to your basis costs you can deduct as current expenses. For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses can't be added to basis. However, you can choose either to deduct or to capitalize certain other costs. If you capitalize these costs, include them in your basis. If you deduct them, don't include them in your basis. See Uniform Capitalization Rules , earlier.
Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules.
Research and experimentation costs.
Intangible drilling and development costs for oil, gas, and geothermal wells.
Exploration costs for new mineral deposits.
Mining development costs for a new mineral deposit.
Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical.
Costs of removing architectural and transportation barriers to people with disabilities and the elderly. If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit.
For more information about deducting or capitalizing costs, see chapter 7 in Pub. 535.
|Increases to Basis||Decreases to Basis|
Putting an addition on your home
Replacing an entire roof
Paving your driveway
Installing central air conditioning
Rewiring your home
|Exclusion from income of subsidies for energy conservation measures
Casualty or theft loss deductions and insurance reimbursements
Certain vehicle credits
|Assessments for local improvements:
|Section 179 deduction|
Restoring damaged property
Nontaxable corporate distributions
Cost of defending and perfecting a title
The following are some items that reduce the basis of property.
Section 179 deduction.
Nontaxable corporate distributions.
Deductions previously allowed (or allowable) for amortization, depreciation, and depletion.
Exclusion of subsidies for energy conservation measures.
Certain vehicle credits.
Residential energy credits.
Postponed gain from sale of home.
Investment credit (part or all) taken.
Casualty and theft losses and insurance reimbursement.
Certain canceled debt excluded from income.
Rebates treated as adjustments to the sales price.
Adoption tax benefits.
Credit for employer-provided child care.
Partial disposition of MACRS property, whether you elect to recognize the partial disposition or are required to recognize it.
Some of these items are discussed next.
If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance.
If you dispose of a portion of MACRS property because of a loss sustained from a casualty event, decrease the basis in the property by any insurance or other reimbursement and by any deductible loss on the disposed portion of the property that isn't covered by insurance. The deductible loss is generally the decrease in the fair market value of the property resulting from the casualty event, but is limited to the adjusted basis of the disposed portion of the MACRS property.
You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. To make this determination, compare the repaired property to the property before the casualty. If the amount you spent didn't otherwise improve the property, then it's deductible as a repair and doesn't affect basis. For more information on casualty and theft losses, see Pub. 547.
The amount you receive for granting an easement is generally considered to be a 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.
Unless you elect not to claim the qualified vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. For more information on available credits, see Form 8834, Qualified Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit; and the related instructions.
Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. If the car is imported, the 1-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use.
If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. For more information about the section 179 deduction, see Pub. 946.
You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any 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 on this subsidy, see Pub. 525.
Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. If you didn't take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken.
Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted.
If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year.
In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules.
For information on figuring depreciation, see Pub. 946.
If you're claiming depreciation on a business vehicle, see Pub. 463. If the car isn't used more than 50% for business during the tax year, you may have to recapture excess depreciation. Include the excess depreciation in your gross income and add it to your basis in the property. For information on the computation of excess depreciation, see chapter 4 in Pub. 463.
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're liable or which attaches to property you hold.
You can exclude canceled debt from income in the following situations.
Debt canceled in a bankruptcy case or when you're insolvent.
Qualified farm debt.
Qualified real property business debt (provided you're not a C corporation).
If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount.
For more information about canceled debt in a bankruptcy case or during insolvency, see Pub. 908, Bankruptcy Tax Guide. For more information about canceled debt that is qualified farm debt, see chapter 3 in Pub. 225. For more information about qualified real property business debt, see chapter 5 in Pub. 334, Tax Guide for Small Business.
If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. For more information on the rules for the sale of a home, see Pub. 523.
If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. This also applies to amounts you received under an employer's adoption assistance program and excluded from income. For more information, see Form 8839, Qualified Adoption Expenses.
If you're an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. You must reduce your basis in that property by the credit claimed. For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services.
If you sell a portion of MACRS property (a MACRS asset), you must reduce the adjusted basis of the asset by the adjusted basis of the portion sold. Use your records to determine which portion of the asset was sold, the date the asset was placed in service, the unadjusted basis of the portion sold, and its adjusted basis. See the partial disposition rules in Regulations section 1.168(i)-8 for more detail. The adjusted basis of the portion sold is used to determine the gain or loss realized on the sale. Also see Pub. 544.
If you physically abandon a portion of MACRS property (a MACRS asset) and you elect to recognize the loss on the abandonment by reporting the loss on your tax return, you must reduce the adjusted basis of the MACRS asset by the adjusted basis of the portion abandoned. Use your records to determine which portion of the asset was abandoned, the date the asset was placed in service, the unadjusted basis of the portion abandoned, and its adjusted basis. See the partial disposition rules in Regulations section 1.168(i)-8 for more detail. Also see Example 2 and Example 3 below.
There are many times when you can't 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.
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.
A 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, don't include the difference in income. However, your basis in the property is still its FMV. See Employee Discounts in Pub. 15-B.
If 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.
Your employer gives you stock for services performed under the condition that you'll have to return the stock unless you complete 5 years of service. The stock is under a substantial risk of forfeiture and isn't substantially vested when you receive it. You don't report any income until you have completed the 5 years of service that satisfy the condition.
A 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.
You 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.
A nontaxable exchange is an exchange in which you're not taxed on any gain and you can't 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.
The exchange of property for the same kind of property may qualify as a nontaxable exchange under section 1031 of the Internal Revenue Code. Beginning after 2017, nontaxable like-kind exchange treatment under section 1031 applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale. Before 2017, section 1031 also applied to certain exchanges of personal or intangible property. Nontaxable like-kind exchange treatment under section 1031 will still apply to a qualifying exchange of personal or intangible property if the taxpayer disposed of the exchanged property on or before December 31, 2017, or received replacement property on or before that date.
To qualify as a like-kind exchange, you must hold for business or investment purposes both the real property you transfer and the real property you receive. There must also be an exchange of like-kind property. For more information, see Like-Kind Exchanges in Pub. 544.
The basis of the property you receive is the same as the basis of the property you gave up.
You 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 property ($50,000).
A 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.
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 a parcel of real property with an adjusted basis of $60,000 for another parcel of real property with an FMV of $52,000 and $10,000 cash. You realize a gain of $2,000 (the FMV of the parcel of real property received plus the cash minus the adjusted basis of real property you traded ($52,000 + $10,000 – $60,000)). You must include all $2,000 of the gain in income as recognized gain because the gain is less than the cash received. Your basis in the newly acquired parcel of real property is as follows:
|Adjusted basis of old property||$60,000|
|Minus: Cash received (adjustment 1(a))||10,000|
|Plus: Gain recognized (adjustment 2(b))||2,000|
|Basis of new property||$52,000|
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.
You have real property held for productive use in your trade or business. Its adjusted basis is $500,000 and its fair market value is $750,000. You're interested in replacing the property with real estate containing a building worth $900,000. Ordinarily, you would swap properties and pay the $150,000 difference in fair market values. Your basis would then be $650,000 ($150,000 cash paid plus $500,000 adjusted basis in your old property).
You want your new real property to have a larger basis for depreciation, so you arrange to sell your old property to the other party. You then buy the new property from that individual for $900,000. However, if the sale and purchase are reciprocal and mutually dependent, you're treated as having exchanged your old property for the new property. In that case, your basis for depreciation for the new property is $650,000, the same as if you had exchanged the old property for the new property.
If you have real property, a portion of which is used for business and a portion of which is used for personal use, and you exchange it in a nontaxable exchange for real property to be used wholly or partly in your business, the basis of the property you receive is figured separately for the business and nonbusiness use parts. The part of the property used for business is an exchange of like-kind property. The personal-use part of the property is property on which gain is recognized.
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.
You're 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 Pub. 523.
The 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 U.S. 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 Pub. 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 Pub. 504, Divorced or Separated Individuals.
To 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.
If 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.
You 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'll 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'll 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.
If 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.
The basis of property inherited 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 doesn't 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.
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals 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 includible 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 Pub. 555, Community Property.
The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety.
John 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 includible 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: ½ of $12,000 depreciation before John's death||6,000|
|Jim's basis at the date of John's death||$44,000|
If Jim hadn't 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.
Include one-half of the value of a qualified joint interest in the decedent's gross estate. It doesn't matter how much each spouse contributed to the purchase price. Also, it doesn't matter which spouse dies first.
A qualified joint interest is any interest in property held by married individuals as either of the following.
Tenants by the entirety.
Joint tenants with right of survivorship if the married couple are the only joint tenants.
Under 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.
If 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.
If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.
Getting answers to your tax law questions. On IRS.gov, get answers to your tax questions anytime, anywhere.
Go to IRS.gov/Help for a variety of tools that will help you get answers to some of the most common tax questions.
Go to IRS.gov/ITA for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records.
Go to IRS.gov/Pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, 2018 tax changes, and thousands of interactive links to help you find answers to your questions. View it online in HTML, as a PDF, or download it to your mobile device as an eBook.
You may also be able to access tax law information in your electronic filing software.
TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.
The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov/ to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.
TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you'll be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:
Your problem is causing financial difficulty for you, your family, or your business;
You face (or your business is facing) an immediate threat of adverse action; or
You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.
TAS has offices in every state, the District of Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/Contact-Us. You can also call them at 877-777-4778.
TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to them at IRS.gov/SAMS.
TAS also has a website, Tax Reform Changes, which shows you how the new tax law may change your future tax filings and helps you plan for these changes. The information is categorized by tax topic in the order of the IRS Form 1040. Go to TaxChanges.us for more information.
LITCs are independent from the IRS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. To find a clinic near you, visit TaxpayerAdvocate.IRS.gov/LITCmap or see IRS Pub. 4134, Low Income Taxpayer Clinic List.
- Adjusted basis
- Adoption tax benefits, Adoption Tax Benefits
- Assessment for local improvements, Assessments for Local Improvements
- Canceled debt, Canceled Debt Excluded From Income
- Casualty and theft losses, Casualties and Thefts
- Credit for qualified electric vehicles, Vehicle Credits
- Decreases to, Decreases to Basis
- Depreciation, Depreciation
- Easements, Easements
- Employer-provided child care, Employer-Provided Child Care
- Example, Adjustments to Basis Examples
- Gain from sale of home, Postponed Gain From Sale of Home
- Gas-guzzler tax, Gas-Guzzler Tax
- Increases to, Increases to Basis
- Section 179 deduction, Section 179 Deduction
- Subsidies for energy conservation, Exclusion of Subsidies for Energy Conservation Measures
- Adoption tax benefits, Adoption Tax Benefits
- Allocating basis, Allocating the Basis
- Assistance (see Tax help)
- Assumption of mortgage, Assumption of mortgage.
- Canceled debt, Canceled Debt Excluded From Income
- Casualty and theft losses, Casualties and Thefts
- Change to business use, Property Changed to Business or Rental Use
- Community property, Community Property
- Constructing assets, Constructing assets.
- Copyrights, Copyrights.
- Cost basis
- Allocating basis, Allocating the Basis
- Assumption of mortgage, Assumption of mortgage.
- Capitalized costs, Activities subject to the rules., Deducting vs. Capitalizing Costs
- Loans, low or no interest, Loans with low or no interest.
- Real estate taxes, Real estate taxes.
- Real property, Real Property
- Settlement costs (fees), Settlement costs.
- Partially nontaxable exchanges, Partially Nontaxable Exchange
- Patents, Patents.
- Points, Points.
- Property changed to business use, Property Changed to Business or Rental Use
- Property received as a gift, Property Received as a Gift
- Property received for services
- Property transferred from a spouse, Property Transferred From a Spouse
- Publications (see Tax help)