||2001 Tax Year
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.
Increases to 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 recapture amount.
If you make additions or improvements to business property, keep
separate accounts for them. Also, depreciate the basis of each
according to the depreciation rules that would apply to the underlying
property had you placed it in service at the same time you placed the
addition or improvement in service. For more information, see
The following items increase the basis of property.
- The cost of extending utility service lines to the
- Legal fees, such as the cost of defending and perfecting
- Legal fees for obtaining a decrease in an assessment levied
against property to pay for local improvements.
- Zoning costs.
- The capitalized value of a redeemable ground rent.
Increase the basis of property by assessments for items such as
paving roads and building ditches that increase the value of the
property assessed. Do not deduct them as taxes. However, you can
deduct as taxes charges for maintenance, repairs, or interest charges
related to the improvements.
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
Deducting vs. Capitalizing Costs
Do not 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 cannot 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, do not include them in your basis. (See Uniform
Capitalization Rules, earlier.)
The costs you can choose to deduct or to capitalize include the
- Carrying charges, such as interest and taxes, that you pay
to own property, except carrying charges that must be capitalized
under the uniform capitalization rules.
- Research and experimentation costs.
- Intangible drilling and development costs for oil, gas, and
- Exploration costs for new mineral deposits.
- Mining development costs for a new mineral deposit.
- Costs of establishing, maintaining, or increasing the
circulation of a newspaper or other periodical.
- Cost of removing architectural and transportation barriers
to people with disabilities and the elderly. If you claim the disabled
access credit, you must reduce the amount you deduct or capitalize by
the amount of the credit.
For more information about deducting or capitalizing costs, see
chapter 8 in Publication 535.
Table 1. Examples of Increases and Decreases to Basis
Decreases to Basis
The following items reduce the basis of property.
- Section 179 deduction.
- Deduction for clean-fuel vehicles and refueling property.
- Nontaxable corporate distributions.
- Deductions previously allowed (or allowable) for
amortization, depreciation, and depletion.
- Exclusion of subsidies for energy conservation measures.
- Credit for qualified electric vehicles.
- Postponed gain from sale of home.
- Investment credit (part or all) taken.
- Casualty and theft losses and insurance
- Certain canceled debt excluded from income.
- Rebates received from a manufacturer or seller.
- Gas-guzzler tax.
- Tax credit or refund for buying a diesel-powered highway
- Adoption tax benefits.
Some of these items are discussed next.
Casualties and Thefts
If you have a casualty or theft loss, decrease the basis in your
property by the amount of any insurance or other reimbursement and by
any deductible loss not covered by insurance.
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. For more information on casualty and theft losses, see
Casualties, Disasters, and Thefts.
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.
Credit for Qualified
If you claim the credit for a qualified electric vehicle, you must
reduce your basis in that vehicle by the lesser of the following
- 10% of the vehicle's cost.
This basis reduction rule applies even if the credit allowed is
less than the reduction. For more information on this credit, see
chapter 12 in Publication 535.
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 one-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 received an income tax credit or refund for a diesel-powered
highway vehicle purchased before August 21, 1996, reduce your basis in
that vehicle by the credit or refund allowable.
Section 179 Deduction
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 Publication 946.
Deduction for Clean-Fuel Vehicles and Refueling Property
If you take the deduction for clean-fuel vehicles or clean-fuel
vehicle refueling property, decrease the basis of the property by the
amount of the deduction. For more information about these deductions,
see chapter 12 in Publication 535.
Exclusion of Subsidies for Energy Conservation Measures
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 Publication 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 did not take a depreciation
deduction, reduce the basis by the full amount of the depreciation you
could have taken.
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 Publication 946.
If you are claiming depreciation on a business vehicle, see
If the car is not 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 Publication 463.
Canceled Debt Excluded
If a debt you owe is canceled or forgiven, other than as a gift or
bequest, you generally must include the canceled amount in your gross
income for tax purposes. A debt includes any indebtedness for which
you are liable or which attaches to property you hold.
You can exclude your canceled debt from income in the following
- Debt canceled in a bankruptcy case or when you are
- Qualified farm debt.
- Qualified real property business debt (provided you are not
a C corporation).
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 Publication 908, Bankruptcy Tax Guide.
For more information about canceled debt that is qualified farm
debt, see chapter 4 in Publication 225.
For more information about
qualified real property business debt, see chapter 5 in Publication 334,
Tax Guide for Small Business.
Postponed Gain From Sale of Home
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
Adoption Tax Benefits
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 on these benefits, see Publication 968,
Benefits for Adoption.
In January 1995, 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 1995 through 1999. In 1998 you had a casualty
loss that was not covered by insurance of $5,000 on the building from
a fire. You claimed this loss as a deduction and spent $5,500 to
repair the fire damages. The adjusted basis of the building on January
1, 2000, is figured as follows:
|Original cost of building, including fees and
|Adjustments to basis:|
| Repair of fire damages
| || ||$97,775|
| Deducted casualty loss
|Adjusted basis on January 1, 2000
The basis of the land, $10,325, remains unchanged. It is not
affected by any of the above adjustments, which affect only the basis
of the building.
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