Adjusted Basis Before figuring any gain or loss on a sale, exchange, or otherdisposition of property or figuring allowable depreciation, depletion,or amortization, you must usually make certain adjustments to thebasis of the property. The result of these adjustments to the basis isthe adjusted basis. Increases to Basis Increase the basis of any property by all items properly added to acapital account. These include the cost of any improvements having auseful life of more than 1 year and amounts spent after a casualty torestore the damaged property. The following are items that increase the basis of property. The cost of extending utility service lines toproperty. Legal fees, such as the cost of defending and perfectingtitle. Legal fees for obtaining a decrease in a government chargelevied against property to pay for local improvements. If you make additions or improvements to business property, keepseparate accounts for them. Also, depreciate the basis of eachaccording to the depreciation rules in effect when you placed theaddition or improvement in service. See chapter 8. Government charges for local improvements.Increase the basis of property by government charges for items suchas paving roads and building ditches that increase the value of theproperty assessed. Do not deduct them as taxes. However, you candeduct as taxes charges that are for maintenance, repairs, or interestcharges related to the improvements. 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 thatare deductible as business expenses, cannot be added to basis.However, you can choose either to deduct or to capitalize certainother costs. If you capitalize these costs, include them in yourbasis. If you deduct them, do not include them in your basis. Seechapter 11 in Publication 535. Decreases to Basis All the following reduce the basis of your property. The section 179 deduction. The deduction for clean-fuel vehicles and clean-fuel vehiclerefueling property. Investment credit (part or all of credit) taken. Casualty and theft losses and insurancereimbursements. Amounts you receive for granting an easement. Deductions previously allowed or allowable for amortization,depreciation, and depletion. Exclusion from income of subsidies for energy conservationmeasures. Credit for qualified electric vehicles. Gain on the sale of your home on which tax waspostponed. Certain canceled debt excluded from income. Rebates received from a manufacturer or seller. Patronage dividends received as a result of a purchase ofproperty. See Patronage Dividends (Distributions) inchapter 4. Gas-guzzler tax. Some of these decreases to basis are discussed next. Section 179 deduction.If you choose to take the section 179 deduction for all or part ofthe cost of property, decrease the basis of the property by thededuction. For more information, see Section 179 Deductionin chapter 8. Deduction for clean-fuel vehicle and clean-fuel vehiclerefueling property.If you take the deduction for clean-fuel vehicles or clean-fuelvehicle refueling property, decrease the basis of the property by theamount of the deduction. For more information about these deductions,see chapter 15 in Publication 535. Casualties and thefts.If you have a casualty or theft loss, decrease the basis of yourproperty by the amount of any insurance or other reimbursement. Also,decrease it by any deductible loss not covered by insurance. However,increase your basis for amounts you spend after a casualty to restorethe damaged property. See chapter 13for information about figuringyour casualty or theft loss. Easements.The amount you receive for granting an easement is usuallyconsidered to be from the sale of an interest in your real property.It reduces the basis of the affected part of the property. If theamount received is more than the basis of the part of the propertyaffected by the easement, reduce your basis in that part to zero andtreat the excess as a recognized gain. See Easements andrights-of-way in chapter 4. Depreciation.Decrease the basis of your property by the depreciation youdeducted, or could have deducted, on your tax returns under the methodof depreciation you chose. If you took less depreciation than youcould have under the method you chose, decrease the basis by theamount you could have taken under that method. If you did not take adepreciation deduction, figure the amount of depreciation you couldhave taken. If you deducted more depreciation than you should have,decrease your basis as follows. Decrease it by the amount you shouldhave deducted plus the part of the excess depreciation you deductedthat actually reduced your tax liability for any year. See chapter 8for information on figuring the depreciation youshould have claimed. See also Changing Your Accounting Methodin chapter 8for information that may benefit you if youdeducted the wrong amount of depreciation. In decreasing your basis for depreciation, take into account theamount deducted on your tax returns as depreciation and anydepreciation you must capitalize under the uniform capitalizationrules. Exclusion from income of subsidies for energy conservationmeasures.If you received a subsidy from a utility company for the purchaseor installation of any energy conservation measure for a dwellingunit, you can exclude it from income. Reduce the basis of the propertyfor which you received the subsidy by the excluded amount. For moreinformation about this subsidy, see Publication 525, Taxable andNontaxable Income. Credit for qualified electric vehicle.If you claim the credit for a qualified electric vehicle, you mustreduce your basis in that vehicle by the lesser of the followingamounts. $4,000. 10% of the vehicle's cost. This reduction amount applies even if the credit allowed is lessthan that amount. For more information on this credit, see chapter 15 in Publication 535. Canceled debt excluded from income.If a debt you owe is canceled or forgiven, other than as a gift orbequest, you generally must include the canceled amount in your grossincome for tax purposes. A debt includes indebtedness for which youare liable or which attaches to property you hold. You can exclude your canceled debt from income if the debt isincluded in any of the following categories. Debt that is canceled in a bankruptcy case or when you areinsolvent. Qualified farm debt. Qualified real property business debt (provided you are nota C corporation). If you exclude from income canceled debt described in (1) or(2), you may have to reduce the basis of your depreciable andnondepreciable property. However, for canceled debt described in (3)that you exclude from income, you must reduce the basis ofyour depreciable property by the excluded amount. For more information about canceled debt in a bankruptcy case, seePublication 908. For more information about insolvency and canceleddebt that is qualified farm debt, see chapter 4.For more informationabout qualified real property business debt, see chapter 5 inPublication 334.