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Publication 551

Basis of  


Future Developments(p1)

For the latest information about developments related to Pub. 551, such as legislation enacted after this publication was published, go to


Photographs of missing children.(p1)
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.
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 cannot 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.

Comments and suggestions.(p2)

We welcome your comments about this publication and your suggestions for future editions.
You can send us comments from Click on "More Information" and then on "Give us feedback."
Or you can write to:

Internal Revenue Service
Tax Forms and Publications
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.
Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.
Ordering forms and publications.(p2)
Visit to download forms and publications. Otherwise, you can go to to order current and prior-year forms and instructions. Your order should arrive within 10 business days.
Tax questions.(p2)
If you have a tax question not answered by this publication, check and How To Get Tax Help at the end of this publication.


Useful items

You may want to see:

 463  Travel, Entertainment, 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.

Cost Basis(p2)


Words you may need to know (see Glossary)

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.(p2)

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.(p2)

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.

Stocks and Bonds(p2)

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.(p2)

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 cannot 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.(p2)

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(p2)

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.(p2)

If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. You cannot 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. Do not include that amount in the basis of the property. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.

Settlement costs.(p2)

Your basis includes the settlement fees and closing costs for buying property. You cannot 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 do not 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 cannot include in the basis of the property.
  1. Casualty insurance premiums.
  2. Rent for occupancy of the property before closing.
  3. Charges for utilities or other services related to occupancy of the property before closing.
  4. Charges connected with getting a loan. The following are examples of these charges.
    1. Points (discount points, loan origination fees).
    2. Mortgage insurance premiums.
    3. Loan assumption fees.
    4. Cost of a credit report.
    5. Fees for an appraisal required by a lender.
  5. Fees for refinancing a mortgage.
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.


If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not 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.(p3)
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 are 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.(p3)

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.


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.(p3)

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, do not deduct the following expenses. You must include them in the asset's basis.
Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct.

Business Assets(p3)


Words you may need to know (see Glossary)

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, next.

Uniform Capitalization Rules(p3)

The uniform capitalization rules specify the costs you add to basis in certain circumstances.

Activities subject to the rules.(p3)

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.
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 cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules.


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 is not subject to the uniform capitalization rules.

More information.(p3)

For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Pub. 538, Accounting Periods and Methods.


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(p3)

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.


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 cannot include them in the basis of the patent. The value of the inventor's time spent on an invention is not part of the basis.


If you are 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. Do not include the value of your time as the author, or any other person's time you did not pay for.

Franchises, trademarks, and trade names.(p4)

If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense.

Allocating the Basis(p4)

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.

Group of Assets Acquired(p4)

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.

Trade or Business Acquired(p4)

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 in the following order.
  1. Certificates of deposit, U.S. Government securities, foreign currency, and actively traded personal property, including stock and securities.
  2. Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes.
  3. 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.
  4. All other assets except section 197 intangibles, goodwill, and going concern value.
  5. Section 197 intangibles except goodwill and going concern value.
  6. Goodwill and going concern value (whether or not they qualify as section 197 intangibles).


The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. This agreement is binding on both parties unless the IRS determines the amounts are not appropriate.

Reporting requirement.(p4)

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.(p4)

See Sale of a Business in chapter 2 of Pub. 544 for more information.

Land and Buildings(p4)

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 are 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.(p4)

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. Do not claim the costs as a current deduction.
Modification of building.(p4)
A modification of a building will not be treated as a demolition if 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.(p4)

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 do not 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.(p4)
If you are 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.(p4)
If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot 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.


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 cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations.