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IRS.gov Website
Publication 225
taxmap/pubs/p225-029.htm#en_us_publink1000218080

Basis Other Than Cost(p34)

rule
There are times when you cannot use cost as basis. In these situations, the FMV or the adjusted basis of property may be used. Examples are discussed next.
taxmap/pubs/p225-029.htm#en_us_publink1000218081

Property changed from personal to business or rental use.(p34)

rule
When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business.
The basis for depreciation is the lesser of:
If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. The basis for figuring a gain is your adjusted basis in the property when you sell the property. Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis.
taxmap/pubs/p225-029.htm#en_us_publink1000218082

Property received for services.(p34)

rule
If you receive property for services, include the property's FMV in income. The amount you include in income becomes your basis. If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary.
taxmap/pubs/p225-029.htm#en_us_publink1000218083

Example.(p34)

Rocco Stowsa is an accountant and also operates a farming business. Rocco agreed to do some accounting work for his neighbor in exchange for a dairy cow. The accounting work and the cow are each worth $1,500. Rocco must include $1,500 in income for his accounting services. Rocco's basis in the cow is $1,500.
taxmap/pubs/p225-029.htm#en_us_publink1000218084

Taxable Exchanges(p34)

rule
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. A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange.
taxmap/pubs/p225-029.htm#en_us_publink1000218085

Example.(p34)

You trade a tract of farmland with an adjusted basis of $20,000 for a tractor that has an FMV of $60,000. You must report a taxable gain of $40,000 for the land. The tractor has a basis of $60,000.
taxmap/pubs/p225-029.htm#en_us_publink1000218091

Nontaxable Exchanges(p34)

rule
A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. A nontaxable gain or loss also is known as an unrecognized gain or loss. If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred.
taxmap/pubs/p225-029.htm#en_us_publink100032808

Involuntary Conversions(p34)

rule
If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property.
taxmap/pubs/p225-029.htm#en_us_publink100032809

Similar or related property.(p34)

rule
If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. However, make the following adjustments.
  1. Decrease the basis by the following amounts.
    1. Any loss you recognize on the involuntary conversion.
    2. Any money you receive that you do not spend on similar property.
  2. Increase the basis by the following amounts.
    1. Any gain you recognize on the involuntary conversion.
    2. Any cost of acquiring the replacement property.
taxmap/pubs/p225-029.htm#en_us_publink100032810

Money or property not similar or related.(p34)

rule
If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion.
taxmap/pubs/p225-029.htm#en_us_publink100032811

Allocating the basis.(p34)

rule
If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs.
taxmap/pubs/p225-029.htm#en_us_publink100032812

Basis for depreciation.(p34)

rule
Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. For more information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7.
For more information about involuntary conversions, see chapter 11.
taxmap/pubs/p225-029.htm#en_us_publink1000218092

Like-Kind Exchanges(p34)

rule
Generally, if you exchange real property you use in your business or hold for investment solely for other business or investment real property of a like kind, you do not recognize the gain or loss from the exchange. If you also receive non-like-kind property or money as part of the exchange, you do recognize gain, but only to the extent of the value of the other property or money you received in the exchange, and you do not recognize any loss.
For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. There must also be an exchange of like-kind property. For more information, see Like-Kind Exchanges in chapter 8.
The basis of the property you receive generally is the same as the adjusted basis of the property you gave up.
taxmap/pubs/p225-029.htm#en_us_publink1000218094

Example. (p34)

You trade farmland for another larger tract of farmland. Your adjusted basis in your farmland is $110,000. The FMV of the new tract of farmland is $150,000. Because this is a nontaxable exchange, you do not recognize any gain and your basis in the farmland you receive is $110,000, the same as the adjusted basis in the farmland you exchanged.
taxmap/pubs/p225-029.htm#en_us_publink1000218096

Exchange expenses.(p34)

rule
Exchange expenses generally are the closing costs that you pay. They include such items as brokerage commissions, attorney fees, and deed preparation fees. Add them to the basis of the like-kind property you receive.
taxmap/pubs/p225-029.htm#en_us_publink1000218097

Property plus cash.(p34)

rule
If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is increased by the money you paid.
taxmap/pubs/p225-029.htm#en_us_publink1000218098

Example.(p34)

Assume the same facts from the previous example except you pay an additional $20,000 in cash. Your adjusted basis in the newly acquired farming real estate is $130,000 ($110,000 adjusted basis of your old farmland plus the $20,000 cash you paid).
taxmap/pubs/p225-029.htm#en_us_publink1000218099

Special rules for related persons.(p34)

rule
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 unless the loss is not deductible under the related party rules. Each person reports it on the tax return filed for the year in which the later disposition occurred. If this rule applies, the basis of the property received in the original exchange will be its FMV. For more information, see chapter 8.
taxmap/pubs/p225-029.htm#en_us_publink1000218101

Basis for depreciation.(p34)

rule
Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. For more information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7.
taxmap/pubs/p225-029.htm#en_us_publink1000218102

Partially Nontaxable Exchanges(p34)

rule
A partially nontaxable exchange is an exchange in which you receive property that is not a like-kind property or money in addition to a like-kind property. The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments.
  1. Decrease the basis by the following amounts.
    1. Any money you receive.
    2. Any loss you recognize on the exchange.
  2. Increase the basis by the following amounts.
    1. Any additional costs you incur.
    2. Any gain you recognize on the exchange.
If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange.
taxmap/pubs/p225-029.htm#en_us_publink1000218103

Example. (p35)

You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. You realize a gain of $40,000. This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Include your gain in income (recognize gain) only to the extent of the cash received. Your basis in the land you received is figured as follows.
Basis of land traded$100,000
Minus: Cash received (adjustment 1(a))− 30,000
 $70,000
Plus: Gain recognized (adjustment 2(b))+ 30,000
Basis of land received$100,000
taxmap/pubs/p225-029.htm#en_us_publink1000218107

Allocation of basis.(p35)

rule
If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. The rest is the basis of the like-kind property.
taxmap/pubs/p225-029.htm#en_us_publink1000218108

Example.(p35)

You trade a tract of farmland with an adjusted basis of $100,000 for another tract of farmland that has an FMV of $92,500. You also receive $4,000 in cash and a pickup truck with an FMV of $11,000. Since only real property qualifies for like-kind exchange treatment, your receipt of the truck and cash means you must recognize gain on the exchange. You realize a gain of $7,500. This is the sum of the FMV of the tract of farmland you receive, the FMV of the truck you receive, and the cash you receive, minus the adjusted basis of the farmland you traded ($92,500 + $11,000 + $4,000 – $100,000). You include in income (recognize) all $7,500 of the gain because it is the lesser of the realized gain ($7,500) and the sum of the FMV of the unlike property and the cash received ($15,000). Your basis in the properties you received is figured as follows.
Adjusted basis old farmland$100,000
Minus: Cash received (adjustment 1(a))− 4,000
 $96,000
Plus: Gain recognized (adjustment 2(b))+ 7,500
Total basis of properties received$103,500
Allocate the basis of $103,500 first to the unlike property, the truck ($11,000). This is the truck's FMV. The rest ($92,500) is the basis in the farmland.
taxmap/pubs/p225-029.htm#en_us_publink1000218110

Sale and Purchase(p35)

rule
If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange.
taxmap/pubs/p225-029.htm#en_us_publink1000218111

Example.(p35)

You own farmland with a barn. The properties have a combined adjusted basis of $70,000, and an FMV of $150,000. You are interested in another tract of farmland with a larger barn owned by your neighbor who is interested in exchanging the property with you. The total FMV of your neighbor's farmland and barn is $200,000. You want the new barn to have a larger basis for depreciation, so you arrange to sell your old farmland and barn to your neighbor for $150,000. Your neighbor then sells his farmland and barn to you for $200,000. However, you are treated as having exchanged the old property for the new property because the sale and purchase are reciprocal and mutually dependent. Your basis in the new property is $120,000 ($50,000 cash paid plus $70,000 adjusted basis in your old property), which must be allocated between the farmland and the barn.
taxmap/pubs/p225-029.htm#en_us_publink1000218112

Property Received as a Gift(p35)

rule
To figure the basis of property you receive as a gift, you must know the donor's adjusted basis (defined earlier) just before it was given to you. You also must know its FMV at the time it was given to you and any gift tax paid on it.
taxmap/pubs/p225-029.htm#en_us_publink1000218113

FMV equal to or greater than donor's adjusted basis.(p35)

rule
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 when you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.
Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. See Adjusted Basis, earlier.
If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid by the following fraction.
Net increase in value of the gift
Amount of the gift
The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift.
taxmap/pubs/p225-029.htm#en_us_publink1000218115

Example.(p35)

In 2018, 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 $35,000 ($50,000 minus the $15,000 annual exclusion). She paid a gift tax of $7,100. Your basis, $26,106, is figured as follows.
Fair market value$50,000
Minus: Adjusted basis−20,000
Net increase in value$30,000
Gift tax paid$7,100
Multiplied by ($30,000 ÷ $35,000)× 0.86
Gift tax due to net increase in value$6,106
Adjusted basis of property to your mother+20,000
Your basis in the property$26,106
Note.If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. However, your basis cannot exceed the FMV of the gift when it was given to you.
taxmap/pubs/p225-029.htm#en_us_publink1000218118

FMV less than donor's adjusted basis.(p35)

rule
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 donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. (See Adjusted Basis, earlier.)
If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property.
taxmap/pubs/p225-029.htm#en_us_publink1000218119

Example.(p35)

You received farmland as a gift from your parents when they retired from farming. At the time of the gift, the land had an FMV of $80,000. Your parents' adjusted basis was $100,000. After you received the land, no events occurred that would increase or decrease your basis.
If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss.
If the sales price is between $80,000 and $100,000, you have neither gain nor loss. For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain.
taxmap/pubs/p225-029.htm#en_us_publink1000218120
Business property.(p35)
If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.
taxmap/pubs/p225-029.htm#en_us_publink1000218121

Property Transferred From a Spouse(p36)

rule
The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred.
The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer.
For more information, see Property Settlements in Pub. 504, Divorced or Separated Individuals.
taxmap/pubs/p225-029.htm#en_us_publink1000218122

Inherited Property(p36)

rule
Your basis in property you inherited from a decedent is generally one of the following.
If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.
taxmap/pubs/p225-029.htm#en_us_publink1000251107

Special-use valuation method.(p36)

rule
Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate.
If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Figure all FMVs without regard to the special-use valuation.
You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. The tax also does not apply if you transfer the property to a member of your family and certain requirements are met.
You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax.
You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that:
For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return; Form 706-A; and the related instructions.
taxmap/pubs/p225-029.htm#en_us_publink1000218124

Property Distributed From a Partnership or Corporation(p36)

rule
The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation.
taxmap/pubs/p225-029.htm#en_us_publink1000218125

Partner's basis.(p36)

rule
Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. For more information, see Partner's Basis for Distributed Property in Pub. 541, Partnerships.
taxmap/pubs/p225-029.htm#en_us_publink1000218126

Shareholder's basis.(p36)

rule
The basis of property distributed by a corporation to a shareholder is its FMV. For more information about corporate distributions, see Distributions to Shareholders in Pub. 542, Corporations.