The basis of property you buy is usually its cost. Cost is the
amount you pay in cash, debt obligations, other property, or services.
Your cost includes amounts you pay for sales tax, freight,
installation, and testing. The basis of real estate and business
assets will include other items. Basis generally does not include
interest payments unless you choose to capitalize them, as discussed
in chapter 5 of Publication 535.
You may also have to capitalize (add to basis) certain other costs
related to buying or producing property. Under the uniform
capitalization rules, discussed later, you may have to capitalize
direct costs and certain indirect costs of 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. See the discussion of unstated interest in
Real property, also called real estate, is land and generally
anything built on, growing on, or attached to land.
If you buy real property, certain fees and other expenses you pay
are part of your cost basis in the property.
If you buy improvements, such as buildings, and the land on which
they stand for a lump sum, allocate your cost basis between the land
and improvements to figure the basis for depreciation of the
improvements. Allocate the cost basis according to the respective fair
market values of the land and improvements at the time of purchase.
Real estate taxes.
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 an expense.
If you reimburse the seller for taxes the seller paid for you, you
usually can deduct that amount as an expense in the year of purchase.
Do not include that amount in the basis of your property. If you did
not reimburse the seller, you must reduce your basis by the amount of
You can include in the basis of property you buy the settlement
fees and closing costs that are for buying the property. (A fee for
buying property is a cost that must be paid even if you bought the
property for cash.) You cannot include fees and costs for getting a
loan on the property.
The following items are some of the settlement fees or closing
costs you can include in the basis of your property.
- Abstract fees (abstract of title fees).
- Charges for installing utility services.
- Legal fees (including title search and preparation of the
sales contract and deed).
- Recording fees.
- Transfer taxes.
- Owner's title insurance.
- Any amounts the seller owes that you agree to pay, such as
back taxes or interest, recording or mortgage fees, charges for
improvements or repairs, and sales commissions.
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.
- Casualty insurance premiums.
- Rent for occupancy of the property before closing.
- Charges for utilities or other services related to occupancy
of the property before closing.
- Fees for refinancing a mortgage.
- Charges connected with getting a loan. The following items
are examples of these charges.
- Mortgage insurance premiums.
- Loan assumption fees.
- Cost of a credit report.
- Fees for an appraisal required by a lender.
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 get a loan (including a mortgage, second
mortgage, or line-of-credit), 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 about deducting points, see
Points in chapter 5 of Publication 535.
Points on home mortgage.
Special rules may apply to points you and the seller pay when you
get a mortgage to buy 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 the amount of any seller-paid points.
For more information, see Points in Publication 936,
Home Mortgage Interest Deduction.
Assumption of a mortgage.
If you buy property and assume (or buy subject to) an existing
mortgage, your basis includes the amount you pay for the property plus
the amount you owe on the mortgage.
If you buy a farm for $100,000 cash and assume a mortgage of
$400,000, your basis is $500,000.
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 items.
- Paid labor and materials.
- Architect's fees.
- Building permit charges.
- Payments to contractors.
- Payments for rental equipment.
- Inspection fees.
In addition, if you use your employees, farm materials, and
equipment to build an asset, your basis would also include the
- Wages paid for the construction work.
- Depreciation on equipment you own while it is used in the
- Operating and maintenance costs for equipment used in the
- Business supplies and materials used in the
Do not deduct these expenses. You must capitalize
them (include them in the asset's basis).
Reduce the asset's basis by any work opportunity credit,
welfare-to-work credit, Indian employment credit, or empowerment zone
employment credit allowable on the wages you pay in (1). For
information about these credits, see Publication 954,
Incentives for Empowerment Zones and Other Distressed Communities.
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.
Allocating the Basis
If you buy multiple assets for a lump sum, allocate the amount you
pay among the assets. Use this allocation to figure your basis for
depreciation and gain or loss on a later disposition of any of these
Group of assets acquired.
If you buy multiple assets for a lump sum, you and the seller may
agree in the sales contract to a specific allocation of the purchase
price among the assets. 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.
In March you bought property for $36,000. In the sales contract,
you and the seller (not a related person) agree to allocate the
purchase price among the assets based on their respective fair market
values (FMV). FMV is defined later under Basis Other Than Cost.
The following is an inventory of the property at its FMV on the date
Your basis in each of the assets is the portion of the
purchase price ($36,000) allocated to that asset.
|Tractor ($15,000 × $30,000)
|Plow ($5,000 × $30,000) ×
|Mower ($6,000 × $30,000) ×
|Manure spreader ($4,000 ×
|Total purchase price
Farming business acquired.
If you buy a group of assets that constitutes a farming business,
there are special rules you must use to allocate the purchase price
among the assets. See Trade or Business Acquired under
Real Property in Publication 551
for more information.
If you buy a cow that is pregnant with a transplanted embryo,
allocate to the basis of the cow the part of the purchase price equal
to the FMV of the cow. Allocate the rest of the purchase price to the
basis of the calf. Neither the cost allocated to the cow nor the cost
allocated to the calf is deductible as a current business expense.
Quotas and allotments.
Certain areas of the country have quotas or allotments for
commodities such as milk, tobacco, and peanuts. The cost of the quota
or allotment is its basis. If you acquire a right to a quota with the
purchase of land or a herd of dairy cows, allocate part of the
purchase price to that right.
Uniform Capitalization Rules
Under the uniform capitalization rules, you must capitalize all
direct costs and an allocable part of indirect costs incurred due to
your production or resale activities. The term capitalize
means to include certain expenses in the basis of property you
produce or in your inventory costs, rather than claiming them as a
current deduction. You recover the costs through depreciation,
amortization, or cost of goods sold when you use, sell, or otherwise
dispose of the property.
Activities subject to the rules.
You are subject to the uniform capitalization rules if you do any
of the following, unless the property is produced for your use other
than in a trade or business or an activity carried on for profit.
- Produce real or tangible personal property.
- Acquire property for resale. However, this rule does not
apply to personal property if your average annual gross receipts for
the three prior tax years are $10 million or less.
You produce property if you construct, build, install, manufacture,
develop, improve, or create the property. You produce property if you
raise or grow any agricultural or horticultural commodity, including
plants and animals.
Generally, you are not required to capitalize the costs of
producing animals and certain plants. See Exceptions,
The direct and indirect costs of producing plants or animals
include preparatory costs and preproductive period costs. Preparatory
costs include the acquisition cost of the seed, seedling, plant, or
animal. For plants, preproductive period costs include the cost of
items such as irrigation, pruning, frost protection, spraying, and
harvesting. For animals, preproductive period costs include the cost
of items such as feed, maintaining pasture or pen areas, breeding,
veterinary services, and bedding.
The term plant includes the following items.
- A fruit, nut, or other crop bearing tree.
- An ornamental tree.
- A vine.
- A bush.
- The crop or yield of a plant that will have more than one
crop or yield.
The term animal includes any stock, poultry or other
bird, and fish or other sea life.
Table 7-1. Preproductive Period of
More Than 2 Years
|Plants producing the
following crops or yields have a nationwide weighted average
preproductive period of more than 2 years.|
|Almonds · Apples Apricots · Avocados Blackberries
· Cherries Blueberries · Chestnuts Coffee Beans · Currants Dates
· Figs · Grapefruit
||Grapes · Guavas Kumquats · Lemons Limes · Macadamia
Nuts Mangoes · Nectarines Olives · Oranges Papayas · Kumquats
||Peaches · Pears Pecans · Persimmons Pistachio Nuts
· Plums Pomegranates · Prunes Raspberries · Tangelos Tangerines
The uniform capitalization rules do not apply to the following.
- Any animal.
- Any plant with a preproductive period of 2 years or
- Costs of replanting certain plants lost or damaged due to
Exceptions (1) and (2) do not apply to a corporation, partnership,
or tax shelter required to use an accrual method of accounting. See
Accrual method required under Accounting Methods
in chapter 3.
In addition, you can choose not to use the uniform capitalization
rules in the case of plants with a preproductive period of more than 2
years. If you make this choice, special rules apply. This choice
cannot be made by a corporation, partnership, or tax shelter required
to use an accrual method of accounting. This choice also does not
apply to any costs incurred for the planting, cultivation,
maintenance, or development of any citrus or almond grove (or any part
thereof) within the first 4 years the trees were planted.
You grow trees that have a preproductive period of more than 2
years. The trees produce an annual crop. You are an individual and the
uniform capitalization rules apply to your farming business. You must
capitalize the direct cost and an allocable part of indirect costs
incurred due to the production of the trees. However, you are not
required to capitalize the costs of producing the crop because its
preproductive period is 2 years or less.
Preproductive period of more than 2 years.
The preproductive period of plants grown in commercial quantities
in the United States is based on their nationwide weighted average
preproductive period. Plants producing the crops or yields shown in
Table 7-1 have a preproductive period of more than 2
years. Other plants may also have a preproductive period of more than
For more information on the uniform capitalization rules, see the
regulations under section 263A of the Internal Revenue Code. Section
1.263A-4 of the regulations applies to property produced in a farming