Basis is a taxpayer’s investment in property for tax purposes. It determines:
- Gain or loss on sale
- Depreciation
- Amortization
- Depletion
- Casualty loss deductions
If property is used partly for business and partly for personal purposes, basis must be allocated by use. Only the business/investment portion is depreciable.
Cost Basis
Cost basis generally includes:
- Cash paid
- Debt assumed
- Property exchanged
- Services provided
Add to basis:
- Commissions
- Sales tax, freight, installation, testing
- Capitalized legal/accounting fees
- Excise taxes, recording fees, transfer taxes
- Title insurance
- Amounts paid on behalf of the seller (back taxes, interest, improvements)
Do not add:
- Loan‑related fees (points, origination, mortgage insurance)
- Pre‑closing utilities or rent
- Escrow deposits
- Casualty insurance premiums
Real Property Basis
When land and buildings are purchased together, allocate basis using FMV or assessed values.
Formula: Asset basis = (FMV of asset ÷ FMV of total property) × purchase price
Settlement costs added to basis include:
- Abstract fees
- Title search and deed prep
- Recording fees
- Survey fees
- Transfer taxes
- Owner’s title insurance
Loan‑related fees are not added to basis.
Basis in Purchased Businesses
When buying a business:
- Subtract cash received
- Allocate remaining purchase price to assets up to FMV
- Any remainder is goodwill
Goodwill is a Section 197 intangible amortized over 180 months.
Adjusted Basis
Adjusted basis = Original basis
- capital improvements
- assessments for local improvements − depreciation − Section 179 − casualty losses − easement proceeds − certain credits − non‑dividend distributions
Demolition costs are added to land basis.
Basis is not increased for appreciation.
Property Received for Services
If property is received as compensation:
- Include FMV in income
- FMV becomes basis
If subject to restrictions, basis is FMV when it vests, unless the taxpayer elects to include FMV at transfer.
Bargain Purchases
If property is purchased below FMV as compensation:
- Include the discount in income
- Basis = purchase price + amount included in income
Involuntary Conversions
For replacement property:
Similar or related property
Basis = old property’s basis − unspent proceeds
- recognized gain
- acquisition costs
Replacement property not similar
Basis = cost − unrecognized gain
Inherited Property
Basis = FMV on date of death (or alternate valuation date). Inherited property always has long‑term holding period.
Property Converted to Business or Rental Use
Basis for depreciation = lower of:
- Adjusted basis at date of conversion
- FMV at date of conversion
For gain on sale: use adjusted basis. For loss on sale: use FMV at conversion (minus depreciation).
Securities Basis
- Basis = purchase price + commissions + transfer fees
- Stock splits / nontaxable dividends: allocate basis pro‑rata
- Return of capital reduces basis