Cost Basis The basis of property you buy is usually its cost. However, in somecases, such as inherited property or property received as a gift, yourbasis will be figured differently. (See Basis Other Than Cost,later.) The cost is the amount you pay in cash, debtobligations, other property, or services. Your cost also includesamounts you pay for sales tax, freight, installation, and testing. Inaddition, the basis of real estate and business assets will includeother items. Basis generally does not include interest payments. You may also have to capitalize (add to basis) certain other costsrelated to buying or producing property. Under the uniformcapitalization rules, discussed later, you may have to capitalizecertain indirect costs of producing property. Loans with low or no interest.If you buy property on any time-payment plan that charges little orno interest, the basis of your property is your stated purchase priceminus the amount considered to be unstated interest. You generallyhave unstated interest if your interest rate is less than theapplicable federal rate. See the discussion of unstated interest inPublication 537. Real Property Real property, also called real estate, is land and generallyanything built on, growing on, or attached to land. If you buy real property, certain fees and other expenses you payare part of your cost basis in the property. You must allocate your cost basis between land and improvements,such as buildings, to figure the basis for depreciation of theimprovements. Allocate the costs according to the fair market valuesof the land and improvements at the time of purchase. Real estate taxes.ERROR MSGIf you pay real estate taxes that the seller owed on real propertyyou bought, and the seller did not reimburse you, treat those taxes aspart of your basis. You cannot deduct them as taxes. If you reimburse the seller for taxes the seller paid for you, youusually can deduct that amount as an expense in the year of purchase.Do not include that amount in the basis of property. If you did notreimburse the seller, you must reduce your basis by the amount ofthose taxes. Settlement costs.You can include in the basis of property you buy the settlementfees and closing costs that are for buying the property. (A fee forbuying property is a cost that must be paid even if you bought theproperty for cash.) You cannot include fees and costs for getting aloan on the property. The following items are some of the settlement fees or closingcosts 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 preparing the salescontract and deed). Recording fees. Surveys. Transfer taxes. Owner's title insurance. Any amounts the seller owes that you agree to pay, such asback taxes or interest, recording or mortgage fees, charges forimprovements or repairs, and sales commissions. Settlement costs do not include amounts placed in escrowfor the future payment of items such as taxes and insurance. The following items are some settlement fees and closing costs youcannot include in the basis of the property. Fire insurance premiums. Rent for occupancy of the property before closing. Charges for utilities or other services related to occupancyof the property before closing. Fees for refinancing a mortgage. Charges connected with getting a loan. The following itemsare 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 becapitalized as costs of getting a loan and can be deducted over theperiod of the loan. Points.If you pay points to get a loan (including a mortgage, secondmortgage, line-of-credit, or a home equity loan), do not add the costto the basis of the related property. Generally, you deduct pointsover the term of the loan. For more information about deductingpoints, see Points in chapter 8 of Publication 535. Points on home mortgage.Special rules may apply to points you and the seller pay when youget 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 existingmortgage on the property, your basis includes the amount you pay forthe property plus the amount to be paid on the mortgage. Example.If you buy a farm for $100,000 cash and assume a mortgage of$400,000 on it, your basis is $500,000. Constructing assets.If you build property or have assets built for you, your expensesfor this construction are part of your basis. Some of these expensesinclude the following items. The cost of purchased land. The cost of 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 or farm materials andequipment to build an asset, your basis would also include thefollowing costs. Employee wages paid for the construction work. Depreciation on equipment you own while it is used in theconstruction. Operating and maintenance costs for equipment used in theconstruction. The cost of business supplies and materials used in theconstruction. Do not deduct these expenses. You must capitalizethem (include them in the asset's basis). Also, reduce your basis byany work opportunity credit, welfare-to-work credit, Indian employmentcredit, or empowerment zone employment credit allowable on the wagesyou pay in (1). For information about these credits, see Publication 954,discount hotels in EgerTax Incentives for Empowerment Zones and Other DistressedCommunities. Caution: Do not include the value of your own labor, or any other labor youdid not pay for, in the basis of any property you construct. Allocating the Basis ERROR MSGIf you buy multiple assets for a lump sum, allocate the amount youpay among the assets you receive. Make this allocation to figure yourbasis for depreciation and gain or loss on a later disposition of anyof these assets. Group of assets acquired.If you buy multiple assets for a lump sum, you and the seller mayagree to a specific allocation of the purchase price among the assetsin the sales contract. If this allocation is based on the value ofeach asset and you and the seller have adverse legal interests, theallocation generally will be accepted. Example.In March you bought property for the lump-sum price of $30,000. Inthe sales contract, you and the seller (not a related person) agree toallocate the purchase price among the assets based on their fairmarket value (FMV). An inventory of the property at its FMV on thedate of purchase is as follows: FMV Tractor $15,000 Plow 5,000 Mower 6,000 Manure spreader      4,000 Total purchase price $30,000 Your basis in each of the assets is its FMV. The FMV ofproperty is defined later under Basis Other Than Cost. Farming business acquired.If you buy a group of assets that is a farming business, there arerules you must use to allocate the purchase price among the assets.See Trade or Business Acquired in Publication 551for moreinformation. Transplanted embryo.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 equalto the FMV of the cow. Allocate the rest of the purchase price to thebasis of the calf. Neither the cost allocated to the cow nor the costallocated to the calf is deductible as a current business expense. Quotas and allotments.Certain areas of the country have quotas or allotments forcommodities such as milk, tobacco, and peanuts. The cost of the quotaor allotment is its basis. If you acquire a right to a quota with thepurchase of land or a herd of dairy cows, allocate part of thepurchase price to that right. Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basisin certain circumstances. You are subject to the uniformcapitalization rules if you do any of the following in your trade orbusiness or activity carried on for profit. Produce real or tangible personal property for use in thebusiness or activity. Produce real or tangible personal property for sale tocustomers. Acquire property for resale. However, you generally do nothave to use the uniform capitalization rules for personal propertyacquired if your average annual gross receipts are $10 million or lessfor the 3 prior tax years. You produce property if you construct, build, install,manufacture, develop, improve, create, raise, or grow the property. TaxTip: You are not required to capitalize the costs of producing animalsand certain plants. See Exceptions, later. billige hotels KilkennyExamples of real property you might produce (build) for use in yourfarming business are barns, chicken houses, and storage sheds.Examples of tangible personal property you might produce for use inyour farming business or for sale to customers include crops raisedfor sale or as animal feed. Other examples are animals raised for sale(beef cattle, hogs, etc.) or animals used in your farming business forbreeding or production purposes (dairy cows). Under the uniform capitalization rules, you must capitalize alldirect costs and an allocable part of most indirect costs you incurdue to your production or resale activities. The term capitalizemeans to include certain expenses in the basis of property youproduce or in your inventory costs, rather than deduct them as currentexpenses. You can recover these costs through depreciation,amortization, or cost of goods sold when you use, sell, or otherwisedispose of the property. Costs that are allocable to property being produced includevariable costs, such as feed and labor, and fixed costs, such asdepreciation on machinery and buildings. For more information about these rules, see the regulations undersection 263A of the Internal Revenue Code. Exceptions.The uniform capitalization rules do not apply to the following. Any animal. Any plant with a preproductive period of 2 years orless. Costs of replanting certain plants lost or damaged due tocasualty. Kastrup hôtelsExceptions (1) and (2) do not apply to a corporation,partnership, or tax shelter required to use an accrual method ofaccounting. See Accrual Method Required in chapter 3. In addition, you can choose not to use the uniform capitalizationrules in the case of plants with a preproductive period of more than 2years. If you make this choice, special rules apply. This choicecannot be made by a corporation, partnership, or tax shelter requiredto use an accrual method of accounting. This choice also does notapply to any costs incurred for the planting, cultivation,maintenance, or development of any citrus or almond grove (or any partthereof) within the first 4 years that the trees were planted. For more information, see section 1.263A-4T of theregulations.