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. For tax years beginning in 2022, small businesses are not subject to the uniform capitalization rules if the average annual gross receipts are $27 million or less for the 3 preceding tax years and the business isn't a tax shelter. See Uniform Capitalization Rules , later.
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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.
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.
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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.
You may also have to capitalize (add to basis) certain other costs related to buying or producing property.
Loans with low or no interest.
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. For more information, see Unstated Interest and Original Issue Discount in Pub. 537.
Purchase of a business.
When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. Allocate the price among the various assets, including any section 197 intangibles. See Allocating the Basis , later.
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.
Identifying stock or bonds sold.
If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. If you buy and sell securities at various times in varying quantities and you can't adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Pub. 550.
Mutual fund shares.
If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. For more information, see Pub. 550.
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.
Real estate taxes.
If you pay real estate taxes the seller owed on real property you bought, and the seller didn't reimburse you, treat those taxes as part of your basis. You can't deduct them as taxes.
If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Don't include that amount in the basis of the property. If you didn't reimburse the seller, you must reduce your basis by the amount of those taxes.
Settlement costs.
Your basis includes the settlement fees and closing costs for buying property. You can't include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash.
The following items are some of the settlement fees or closing costs you can include in the basis of your property.
Settlement costs don't include amounts placed in escrow for the future payment of items such as taxes and insurance.
The following items are some settlement fees and closing costs you can't include in the basis of the property.
If these costs relate to business property, items (1) through (3) are deductible as business expenses. Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan.
Points.
If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), don't add the points to the basis of the related property. Generally, you deduct the points over the term of the loan. For more information on how to deduct points, see Points in chapter 4 of Pub. 535.
Points on home mortgage.
Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. If certain requirements are met, you can deduct the points in full for the year in which they're paid. Reduce the basis of your home by any seller-paid points. For more information, see Points in Pub. 936, Home Mortgage Interest Deduction.
Assumption of mortgage.
If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage.
Example.
If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000.
Constructing assets.
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.
In addition, if you own a business and use your employees, material, and equipment to build an asset, don't deduct the following expenses. You must include them in the asset's basis.
. Don't include the value of your own labor, or any other labor you didn't pay for, in the basis of any property you construct. .
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.
Activities subject to the rules.
You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. However, see Exceptions below.
You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. Tangible personal property includes films, sound recordings, video tapes, books, or similar property.
Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.
Any cost you can't use to figure your taxable income for any tax year isn't subject to the uniform capitalization rules.
Example.
If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. The nondeductible part of the cost isn't subject to the uniform capitalization rules.
More information.
For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Pub. 538, Accounting Periods and Methods.
Exceptions.
For tax years beginning in 2022, you're not subject to the uniform capitalization rules if your average annual gross receipts are $27 million or less for the 3 preceding tax years and you're not a tax shelter. See section 263A(i).
In addition, the following are not subject to the uniform capitalization rules.
For other exceptions to the uniform capitalization rules, see section 1.263A-1(b) of the regulations.
For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 in Pub. 225, Farmer's Tax Guide.
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.
Patents.
The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. If you deduct the research and experimental expenditures as current business expenses, you can't include them in the basis of the patent. The value of the inventor's time spent on an invention isn't part of the basis.
Copyrights.
If you're an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. Don't include the value of your time as the author, or any other person's time you didn't pay for.
Franchises, trademarks, and trade names.
If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense.
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 will generally 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 FMV in the following order.
Agreement.
The buyer and seller may enter into a written agreement as to the allocation of any consideration or the FMV of any of the assets. This agreement is binding on both parties unless the IRS determines the amounts are not appropriate.
Reporting requirement.
Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594 to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred.
More information.
See Sale of a Business in chapter 2 of Pub. 544 for more information.
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.
Demolition of building.
Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. Don't claim the costs as a current deduction.
Modification of building.
A modification of a building won't be treated as a demolition if both the following conditions are satisfied.
If the building is a certified historic structure, the modification must also be part of a certified rehabilitation.
If these conditions are met, add the costs of the modifications to the basis of the building.
Subdivided lots.
If you buy a tract of land and subdivide it, you must determine the basis of each lot. This is necessary because you must figure the gain or loss on the sale of each individual lot. As a result, you don't recover your entire cost in the tract until you have sold all of the lots.
To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. The numerator is the FMV of the lot and the denominator is the FMV of the entire tract.
Future improvement costs.
If you're a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. See Revenue Procedure 92-29, 1992-1 C.B. 748, for more information, including an explanation of the procedures for getting consent from the IRS.
Use of erroneous cost basis.
If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you can't correct the mistake for years for which the statute of limitations (generally, 3 tax years) has expired. Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots.
Example.
You bought a tract of land to which you assigned a cost of $15,000. You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale.
Several years later, you determine that your original basis in the tract was $22,500 and not $15,000. You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). You can't refigure the basis of the eight lots sold in tax years barred by the statute of limitations.
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.
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.
Example.
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.
The costs you can choose to deduct or to capitalize include the following.
For more information about deducting or capitalizing costs, see chapter 7 in Pub. 535.
| Increases to Basis | Decreases to Basis |
| Capital improvements: 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
The following are some items that reduce the basis of property.
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 FMV 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 must generally 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.
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.
Example 1.
In January 2017, you paid $80,000 for real property to be used as a factory. You also paid commissions of $2,000 and title search and legal fees of $600. You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. Immediately, you spent $20,000 in remodeling the building before you placed it in service. You were allowed depreciation of $14,526 for the years 2017 through 2021. In 2020, you had a $5,000 casualty loss from a storm that wasn't covered by insurance on the building. You claimed a deduction for this loss. You spent $5,500 to repair the damages and to otherwise improve the building. The adjusted basis of the building on January 1, 2022, is figured as follows:
| Original cost of building including fees and commissions | $72,275 | ||
| Adjustments to basis: | |||
| Add: | |||
| Improvements | 20,000 | ||
| Repair of damages | 5,500 | ||
| $97,775 | |||
| Subtract: | |||
| Depreciation | $14,526 | ||
| Deducted casualty loss | 5,000 | 19,526 | |
| Adjusted basis on January 1, 2022 | $78,249 | ||
The basis of the land, $10,325, remains unchanged. It's not affected by any of the above adjustments.
Example 2.
You own a building that you purchased in 1990 for $75,000. You use the building in your business. The building is a MACRS asset. You removed and abandoned the roof on the building and replaced it with a new roof. You make the partial disposition election to recognize loss on the abandonment of the old roof by reporting the loss on your timely filed tax return. The loss is the adjusted basis of the roof as of the first day of the tax year of the abandonment. Using your records, you determine that the abandoned roof was placed in service in 1990 with the building, the unadjusted basis of the building attributable to the roof is $5,000, and after you deducted depreciation of $3,500 on the roof, its adjusted basis as of the first day of the tax year of the abandonment is $1,500. Report the $1,500 ordinary loss in Part II of Form 4797. In your depreciation records, you must reduce the unadjusted basis of the building, $75,000, by the unadjusted basis of the roof, $5,000, as well as reduce the accumulated depreciation of the building by the accumulated depreciation on the roof, $3,500. You must also capitalize the cost of the replacement roof and depreciate it as a separate asset from the building.
Example 3.
You own a bulldozer that you purchased 2 years ago for $25,000. You use the bulldozer in your business. The bulldozer is a MACRS asset. You removed and replaced the bucket on the bulldozer with a new bucket. You make the partial disposition election to recognize loss on the abandonment of the old bucket by reporting the loss on your timely filed tax return. The loss is the adjusted basis of the bucket as of the first day of the tax year of the abandonment. Using your records, you determine that the abandoned bucket was placed in service with the bulldozer, the unadjusted basis of the bucket is $5,000, and after you deducted depreciation of $3,800 on the bucket, the adjusted basis of the bucket as of the first day of the tax year of the abandonment is $1,200. Report the $1,200 ordinary loss in Part II of Form 4797. In your depreciation records, you must reduce the unadjusted basis of the bulldozer, $25,000, by the unadjusted basis of the bucket, $5,000, as well as reduce the accumulated depreciation of the bulldozer by the accumulated depreciation on the bucket, $3,800. You must also capitalize the cost of the replacement bucket and begin depreciating it as a separate asset from the bulldozer.
There are many times when you can't use cost as basis. In these cases, the FMV or the adjusted basis of property may be used. Adjusted basis is discussed earlier.
FMV 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.
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.
Example.
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.
FMV
Figure the FMV of property you received without considering any restriction except one that by its terms will never end.
Example.
You received stock from your employer for services you performed. If you want to sell the stock while you're 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.
Election.
You 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 don't apply. Your basis is the amount you paid plus the amount you included in income.
See the discussion of Restricted Property in Pub. 525 for more information.
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.
Example.
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.
If 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.
Similar or related property.
If 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.
Money or property not similar or related.
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.
Example.
The 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 |
Allocating the basis.
If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs.
Example.
The 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.
More information.
For more information about condemnations, see Involuntary Conversions in Pub. 544. For more information about casualty and theft losses, see Pub. 547.
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.
Example.
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).
Exchange expenses.
Exchange 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.
Property plus cash.
If 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.
Example.
You exchange a parcel of real property (adjusted basis of $30,000) for another parcel of real property (FMV $75,000) and pay $40,000. Your basis in the newly acquired real property is $70,000 (the $30,000 adjusted basis of the old parcel plus the $40,000 paid).
Special rules for related persons.
If 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 FMV (at the time of the exchange).
These rules generally don't apply to the following kinds of property dispositions.
Related persons.
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 Pub. 544.
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.
If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange.
Example.
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 |
| $50,000 | |
| Plus: Gain recognized (adjustment 2(b)) | 2,000 |
| Basis of new property | $52,000 |
Allocation of basis.
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.
Example.
You 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's 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.
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.
Example.
You have real property held for productive use in your trade or business. Its adjusted basis is $500,000 and its FMV 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 FMVs. 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.
Example.
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.
Business property.
If 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.
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.
Gift received before 1977.
If 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, don't increase your basis above the FMV of the gift at the time it was given to you.
Example 1.
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.
Example 2.
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.
Gift received after 1976.
If 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 Pub. 559, Survivors, Executors, and Administrators.
Example.
In 2022, 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 $34,000 ($50,000 minus the $16,000 annual exclusion). She paid a gift tax of $6,880. Your basis, $26,054, is figured as follows:
| Fair market value | $50,000 |
| Minus: Adjusted basis | 20,000 |
| Net increase in value | $30,000 |
| Gift tax paid | $6,880 |
| Multiplied by ($30,000 ÷ $34,000) | 0.88 |
| Gift tax due to net increase in value | $6,054 |
| Adjusted basis of property to your mother | 20,000 |
| Your basis in the property | $26,054 |
The basis of property inherited from a decedent is generally one of the following.
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.
Appreciated property.
The above rule doesn't 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.
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.
Example.
John and Jim owned, as joint tenants with right of survivorship, business property 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’s basis in the property at the date of John's death is figured 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, Jim’s 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 contributed no part of the purchase price, Jim’s 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.
Basis.
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.
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.
Special-use valuation.
If you're 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 isn't 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.
For more information, see the Instructions for Form 706 and the Instructions for Form 706-A.
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.
Basis for depreciation.
The basis for depreciation is the lesser of the following amounts.
Example.
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 isn't 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's less than your adjusted basis ($178,000).
Sale of property.
If 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're figuring gain or loss.
The basis for figuring a gain is your adjusted basis when you sell the property.
Example.
Assume 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).
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 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.
Example.
Assume 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's 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).
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 to find resources that can help you right away.
Preparing and filing your tax return.
After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.
Free options for tax preparation.
Go to IRS.gov to see your options for preparing and filing your return online or in your local community, if you qualify, which include the following.
Using online tools to help prepare your return.
Go to IRS.gov/Tools for the following.
. Getting answers to your tax questions. On IRS.gov, you can get up-to-date information on current events and changes in tax law. .
Need someone to prepare your tax return?
There are various types of tax return preparers, including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:
Although the tax preparer always signs the return, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return. Anyone paid to prepare tax returns for others should have a thorough understanding of tax matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.
Coronavirus.
Go to IRS.gov/Coronavirus for links to information on the impact of the coronavirus, as well as tax relief available for individuals and families, small and large businesses, and tax-exempt organizations.
Employers can register to use Business Services Online.
The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure online W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.
IRS social media.
Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.
The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.
Watching IRS videos.
The IRS Video portal (IRSVideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.
Online tax information in other languages.
You can find information on IRS.gov/MyLanguage if English isn’t your native language.
Free Over-the-Phone Interpreter (OPI) Service.
The IRS is committed to serving our multilingual customers by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), other IRS offices, and every VITA/TCE return site. The OPI Service is accessible in more than 350 languages.
Accessibility Helpline available for taxpayers with disabilities.
Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp.
Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.