ADJUSTMENTS TO BASIS
You first have the initial basis which usually is cost. Basis can change either upward or downward.
Items that affects basis are:
1. Acquisitions that prolong the life of the asset longer than a year such as a new roof addition to building and zoning changes.
2. An increase to basis may result from a liability to the extent it is secured by real property and applied to extend its life.
3. Depreciation decreases basis. There are different methods of depreciation and the current method is MACRS. The general depreciation system has different classes of depreciation as follows:
a. 5 year property-automobiles, computers, office machinery, research and experimentation property.
b. 7 year property includes office furniture and fixtures, desks, files and safes, etc.
c. Residential real property means 80% or more gross rental income is from dwelling units. Recovery is 27 1/2 years.
d. Nonresidential property is 1250 property. Recovery period is 39 years.
Addition to Basis Real Estate or Business Assets
1. Cost of property
2. Major improvement
3. Costs to acquire title
a. abstract fees also called title fees
b. charges for installing utility services
c. recording fees
d. surveys
e. transfer taxes
f. owner's title insurance
g. sales commissions
4. Amount paid in notes to the seller
5. sales tax paid in connection with the purchase of a business
6. Delivery charges in connection with a business
7. Demolition costs
8. Interest and taxes attributable to the construction to be used in a business
9. Taxes paid by buyer which are not the responsibility of the buyer such as back taxes
10. Water line to the property
Decrease to Basis
1. Depreciation, amortization and depletion allowed or allowable
2. Section 179 deduction
3. The deduction for clean-fuel vehicles and clean-fuel vehicle refueling property
4. Nontaxable corporate distributions
5. Exclusions from income of subsidies for energy conservation measures
6. Credit for qualified electric vehicles
7. Gain from the sale of your old home on which tax was postponed
8. Casualty and theft losses and insurance reimbursements
9. Certain canceled debt excluded from income
10. Easements
11. Casualty losses-decreased by the amount of the loss, by any amounts recovered by insurance. Floor amount for each casualty occurrence for individuals is $100.00
12. Debt discharge when a taxpayer becomes insolvent and the debt discharge is not included as gross income.
13. Credit on asset purchases-such as building rehabilitation, energy equipment, and low-income housing require a partial or full amount of credit which reduces basis
Do Not Add to Basis
1, Fire insurance premiums
2. Rent for occupancy of the property before closing
3. Charges for utilities or other services relating to occupancy of the property before closing
4. Fees for refinancing a mortgage
5. Charges connected with getting a loan such as:
a. Points (reason you can deduct or amortize them)
b. Mortgage insurance
c. Loan assumption fees
d. Cost of a credit report
e. Fees for an appraisal required by a lender
6. Distributions out of earnings and profits (E&P) are taxable as dividends and do not reduce basis
7. Leasehold improvement-made by the lessee and reverted to the owner (lessor); gives the lessor a zero basis
Adjustments to Stock Basis
Return of capital reduces the basis but not below zero. Once the basis has been reduced to zero, any amounts over the basis is taxable.
Example: ________ has basis in the stock of $10,000 and receives return of capital of $11,000 reducing the stock basis to zero. The $1,000 over the initial basis is taxable.
The End