Basis Other Than Cost There are many times when you cannot use cost as basis. In thesecases, the fair market value or the adjusted basis of property may beused. Adjusted basis is discussed earlier. Fair market value isdiscussed next. Fair market value (FMV).Fair market value (FMV) is the price at which property would changehands between a buyer and a seller, neither having to buy or sell, andboth having reasonable knowledge of all necessary facts. Sales ofsimilar property on or about the same date may help in figuring theFMV of the property. Property changed to business or rental use.When you hold property for personal use and change it to businessuse or use it to produce rent, you must figure its basis fordepreciation. An example of changing property held for personal use tobusiness use would be renting out your former personal residence. Basis for depreciation.The basis for depreciation is the lesser of the following amounts. The FMV of the property on the date of the change. Your adjusted basis on the date of the change. Property received for services.If you receive property for services, include the property's FMV inincome. The amount you include in income becomes your basis. If theservices were performed for a price agreed on beforehand, it will beaccepted as the FMV of the property if there is no evidence to thecontrary. Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the lossis deductible. A taxable gain or deductible loss also is known as arecognized gain or loss. If you receive property inexchange for other property in a taxable exchange, the basis of theproperty you receive is usually its FMV at the time of the exchange. Ataxable exchange occurs when you receive cash or get property that isnot similar or related in use to the property exchanged. Example.You trade a tract of farm land with an adjusted basis of $3,000 fora tractor that has an FMV of $6,000. You must report a taxable gain of$3,000 for the land. The tractor has a basis of $6,000. Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed onany gain and you cannot deduct any loss. If you receive property in anontaxable exchange, its basis is usually the same as the basis of theproperty you transferred. A nontaxable gain or loss also is known asan unrecognized gain or loss. Example.You traded a truck you used in your farming business for a newsmaller truck to use in farming. The adjusted basis of the old truckwas $10,000. The FMV of the new truck was $14,000. If this was ataxable exchange, you would recognize gain of $4,000 ($14,000 FMV ofthe new truck minus the $10,000 adjusted basis of the old truck), andyour basis in the new truck would be $14,000. Because this is anontaxable exchange, you do not recognize the gain, and your basis inthe new truck is $10,000, the same as the adjusted basis of the oldtruck you traded. Like-Kind Exchanges The exchange of property for the same kind of property is the mostcommon type of nontaxable exchange. For an exchange to qualify as a like-kind exchange, you must holdfor business or investment purposes both the property you transfer andthe property you receive. There must also be an exchange of like-kindproperty. For more information, see Like-Kind Exchanges inchapter 10. The basis of the property you receive is the same as the basis ofthe property you gave up. Example.You traded a machine (adjusted basis $8,000) for another like-kindmachine (FMV $9,000). You used both machines in your farming business.The basis of the machine you received is $8,000, the same as themachine traded. Exchange expenses.Exchange expenses generally are the closing costs that you pay.They include such items as brokerage commissions, attorney fees, deedpreparation fees, etc. Add them to the basis of the like-kind propertyyou received. Property plus cash.If you trade property in a nontaxable exchange and also pay money,the basis of the property you receive is the basis of the property yougave up plus the money you paid. Example.You trade in a truck (adjusted basis $3,000) for another truck (FMV$7,500) and pay $4,000. Your basis in the new truck is $7,000 (the$3,000 basis of the old truck plus the $4,000 paid). Special rules for related persons.If a like-kind exchange takes place directly or indirectly betweenrelated persons and either party disposes of the property within 2years after the exchange, the exchange no longer qualifies forlike-kind exchange treatment. Each person must report any gain or lossnot recognized on the original exchange. Each person reports it on thetax return filed for the year in which the later disposition occurred.If this rule applies, the basis of the property received in theoriginal exchange will be its FMV. For more information, see chapter 10. Exchange of business property.Exchanging the property of one business for the property of anotherbusiness is a multiple property exchange. For information on figuringbasis, see Multiple Property Exchanges in chapter 1 ofPublication 544, Sales and Other Dispositions of Assets. Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receiveunlike property or money in addition to like property. The basis ofthe property you receive is the same as the basis of the property yougave up with the following adjustments. Decrease the basis by the following amounts. Any money you receive. ERROR MSGAny loss you recognize on the exchange. Increase the basis by the following amounts. Any additional costs you incur. Any gain you recognize on the exchange. If the other party to the exchange assumes your liabilities,treat the debt assumption as money you received in the exchange. Example 1.You traded farm land (basis $10,000) for another tract of farm land(FMV $11,000). You also received $3,000 cash. You realized a gain of$4,000. This is the FMV of the land received plus the cash minus thebasis of the land you traded ($11,000 + $3,000 - $10,000).Include your gain in income (recognize gain) only to the extent of thecash you received. Your basis in the land you received is figured asfollows.  Basis of land traded $10,000  Minus: Cash received (adjustment 1(a))      - 3,000 $7,000  Plus: Gain recognized (adjustment 2(b))      + 3,000  Basis of land received $10,000 Example 2.You traded a truck (adjusted basis $22,750) for another truck (FMV$20,000). You also received $10,000 cash. You realized a gain of$7,250. This is the FMV of the truck received plus the cash minus theadjusted basis of the truck you traded ($20,000 + $10,000 -$22,750). You include all the gain in your income (recognize gain)because the gain is less than the cash you received. Your basis in thetruck you received is figured as follows.  Adjusted basis of truck traded $22,750  Minus: Cash received (adjustment 1(a))      -10,000 $12,750  Plus: Gain recognized (adjustment 2(b))      + 7,250  Basis of truckreceived $20,000 Allocation of basis.Allocate the basis first to the unlike property, other than money,up to its FMV on the date of the exchange. The rest is the basis ofthe like property. Example.You had an adjusted basis of $15,000 in a tractor you traded foranother tractor that had an FMV of $12,500. You also received $1,000cash and a truck that had an FMV of $3,000. The truck is unlikeproperty. You realized a gain of $1,500. This is the FMV of thetractor received plus the FMV of the truck received plus the cashminus the adjusted basis of the tractor you traded ($12,500 + $3,000 +$1,000 - $15,000). You include in your income (recognize) all$1,500 of the gain because it is less than the FMV of the unlikeproperty plus the cash received. Your basis in the properties youreceived is figured as follows.  Adjusted basis of old tractor $15,000  Minus: Cash received (adjustment 1(a))      - 1,000 $14,000  Plus: Gain recognized (adjustment 2(b))      + 1,500  Total basis of propertiesreceived $15,500 Allocate the total basis of $15,500 first to the unlikeproperty--the truck ($3,000). This is the truck's FMV. The rest($12,500) is the basis of the tractor. Sale and Purchase If you sell property and buy similar property in two mutuallydependent transactions, you may have to treat the sale and purchase asa single nontaxable exchange. Example.Hoteles centrales ZakopaneYou used a tractor on your farm for 3 years. Its adjusted basis is$2,000 and its FMV is $4,000. You are interested in a new tractor,which sells for $15,500. Ordinarily, you would trade your old tractorfor the new one and pay the dealer $11,500. Your basis fordepreciation for the new tractor would then be $13,500 ($11,500 +$2,000, the basis of your old tractor). However, you want a higherbasis for depreciating the new tractor, so you agree to pay the dealer$15,500 for the new tractor if he will pay you $4,000 for your oldtractor. Because the two transactions are dependent on each other, youare treated as having exchanged your old tractor for the new one andpaid $11,500 ($15,500 - $4,000). Your basis for depreciating thenew tractor is $13,500, the same as if you traded the old tractor. Involuntary Conversions If you receive property as a result of an involuntary conversion,such as a casualty, theft, or condemnation, you may figure the basisof the replacement property you receive using the basis of theproperty destroyed, stolen, or condemned (old property). Similar or related property.If the replacement property is similar or related in service or useto the old property, the replacement property's basis is the same asthe old property's basis on the date of the involuntary conversion.However, make the following adjustments. Decrease the basis by the following amounts. Any loss you recognize on the involuntary conversion. Any money you receive that you do not spend on similarproperty. Increase the basis by the following amounts. Any gain you recognize on the involuntary conversion. Any cost of acquiring the replacement property. Money or property that is not similar or related.cheap hotels in MestreIf you receive money or property not similar or related in serviceor use to the old property and you buy replacement property similar orrelated in service or use to the old property, the basis of thereplacement property is its cost decreased by the gain not recognizedon the involuntary conversion. For more information about involuntary conversions, see chapter 13. Property Receivedas a Gift To figure the basis of property you receive as a gift, you mustknow its adjusted basis (defined earlier) to the donor just before itwas given to you. You also must know its FMV at the time it was givento you and any gift tax paid on it. FMV equal to or more than donor's adjusted basis.If the FMV of the property is equal to or more than the donor'sadjusted basis, your basis is the donor's adjusted basis when youreceived the gift. Increase your basis by all or part of any gift taxpaid, depending on the date of the gift. Also, for figuring gain or loss from a sale or other disposition ofthe property, or for figuring depreciation, depletion, or amortizationdeductions on business property, you must increase or decrease yourbasis (the donor's adjusted basis) by any required adjustments tobasis while you held the property. See Adjusted Basis,earlier. Gift received before 1977.If you received a gift before 1977, increase your basis in the gift(the donor's adjusted basis) by any gift tax paid on it. However, donot increase your basis above the FMV of the gift when it was given toyou. Example 1.You were given a house in 1976 with an FMV of $21,000. The donor'sadjusted basis was $20,000. The donor paid a gift tax of $500. Yourbasis is $20,500, the donor's adjusted basis plus the gift tax paid. Example 2.If, in Example 1, the gift tax paid had been $1,500, your basiswould be $21,000. This is the donor's adjusted basis plus the gift taxpaid, limited to the FMV of the house at the time you received thegift. Gift received after 1976.If you received a gift after 1976, increase your basis in the gift(the donor's adjusted basis) by the part of the gift tax paid on itthat is due to the net increase in value of the gift. Figure theincrease by multiplying the gift tax paid by the following fraction. Fraction The net increase in value of the gift is the FMV of the gift minusthe donor's adjusted basis. The amount of the gift is its value forgift tax purposes after reduction by any annual exclusion and maritalor charitable deduction that applies to the gift. For information onthe gift tax, see Publication 950, Introduction to Estate andGift Taxes. Example.In 2000, you received a gift of property from your mother that hadan FMV of $50,000. Her adjusted basis was $20,000. The amount of thegift for gift tax purposes was $40,000 ($50,000 minus the $10,000annual exclusion). She paid a gift tax of $9,000. Your basis, $26,750,is figured as follows: Fair market value $50,000 Minus: Adjusted basis      -20,000 Net increase in value      $30,000 Gift tax paid $9,000 Multiplied by ($30,000 $40,000)         .75 Gift tax due to net increase in value $6,750 Adjusted basis of property to your mother      +20,000 Your basis in the property $26,750 FMV less than donor's adjusted basis.If the FMV of the property at the time of the gift is less than thedonor's adjusted basis, your basis depends on whether you have a gainor a loss when you dispose of the property. Your basis for figuringgain is the donor's adjusted basis plus or minus any requiredadjustment to basis while you held the property. Your basis forfiguring loss is its FMV when you received the gift plus or minus anyrequired adjustment to basis while you held the property. (SeeAdjusted Basis, earlier.) If you use the donor's adjusted basis for figuring a gain and get aloss, and then use the FMV for figuring a loss and get a gain, youhave neither gain nor loss on the sale or other disposition of theproperty. Example.You received farm land as a gift from your parents when theyretired from farming. At the time of the gift, the land had an FMV of$80,000. Your parents' adjusted basis was $100,000. After you receivedthe land, no events occurred that would increase or decrease yourbasis in it. If you sell the land for $120,000, you will have a $20,000 gainbecause you must use the donor's adjusted basis at the time of thegift ($100,000) as your basis to figure a gain. If you sell the landfor $70,000, you will have a $10,000 loss because you must use the FMVat the time of the gift ($80,000) as your basis to figure a loss. If the sales price is between $80,000 and $100,000, you haveneither gain nor loss. For instance, if the sales price was $90,000and you tried to figure a gain using the donor's adjusted basis($100,000), you would get a $10,000 loss. If you then tried to figurea loss using the FMV ($80,000), you would get a $10,000 gain. Business property.If you hold the gift as business property, your basis for figuringany depreciation, depletion, or amortization deductions is the same asthe donor's adjusted basis plus or minus any required adjustments tobasis while you hold the property. Property TransferredFrom a Spouse The basis of property transferred to you or transferred in trustfor your benefit by your spouse is the same as your spouse's adjustedbasis. The same rule applies to a transfer by your former spouse ifthe transfer is incident to divorce. However, adjust your basis forany gain recognized by your spouse or former spouse on propertytransferred in trust. This rule applies only to a transfer of propertyin trust in which the liabilities assumed plus the liabilities towhich the property is subject are more than the adjusted basis of theproperty transferred. The transferor must give you records needed to determine theadjusted basis and holding period of the property as of the date ofthe transfer. For more information, see Publication 504, Divorced orSeparated Individuals. Inherited Property Your basis in property you inherit from a decedent is generally oneof the following. The FMV of the property at the date of the individual'sdeath. The FMV on the alternate valuation date, if the personalrepresentative for the estate chooses to use alternate valuation. Forinformation on the alternate valuation date, see the instructions forForm 706. The value under the special-use valuation method for realproperty used in farming or other closely held business, if chosen forestate tax purposes. This method is discussed next. The decedent's adjusted basis in land to the extent of thevalue that is excluded from the decedent's taxable estate as aqualified conservation easement. For information on a qualifiedconservation easement, see the instructions for Form 706. If a federal estate tax return does not have to be filed, yourbasis in the inherited property is its appraised value at the date ofdeath for state inheritance or transmission taxes. Special farm real property valuation.Under certain conditions, when a person dies, the executor orpersonal representative of that person's estate may choose to valuethe qualified real property on other than its FMV. If so, the executoror personal representative values the qualified real property based onits use as a farm. If the executor or personal representative choosesthis method of valuation for estate tax purposes, this value is thebasis of the property for the heirs. The qualified heirs should beable to get the necessary value from the executor or personalrepresentative of the estate. If you are a qualified heir who received special-use valuationproperty, increase your basis by any gain recognized by the estate ortrust because of post-death appreciation. Post-death appreciation isthe property's FMV on the date of distribution minus the property'sFMV either on the date of the individual's death or on the alternatevaluation date. Figure all FMVs without regard to the special-usevaluation. You may be liable for the additional estate tax if, within 10 yearsafter the death of the decedent, you transfer the property or theproperty stops being used as a farm. This tax may apply if you disposeof the property in a like-kind exchange or involuntary conversion. Thetax does not apply if you transfer the property to a member of yourfamily and certain requirements are met. See Form 706-A and itsinstructions for more information on this tax. You can elect to increase your basis in special-use valuationproperty if it becomes subject to the additional estate tax. Toincrease your basis, you must make an irrevocable election and payinterest on the additional estate tax figured from the date 9 monthsafter the decedent's death until the date of payment of the additionalestate tax. If you meet these requirements, increase your basis in theproperty to its FMV on the date of the decedent's death or thealternate valuation date. The increase in your basis is considered tohave occurred immediately before the event that results in theadditional estate tax. You make the election by filing with Form 706-A, a statementthat does all the following. Contains your (and the estate's) name, address, and taxpayeridentification number. Identifies the election as an election under section 1016(c)of the Internal Revenue Code. Specifies the property for which you are making theelection. Provides any additional information required by the Form706-A instructions. Community property.hotel a BirminghamIn community property states (Arizona, California, Idaho,Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin),husband and wife are each usually considered to own half the communityproperty. When either spouse dies, the total value of the communityproperty, even the part belonging to the surviving spouse, generallybecomes the basis of the entire property. For this rule to apply, atleast half the value of the community property interest must beincludible in the decedent's gross estate, whether or not the estatemust file a return. For example, you and your spouse owned community property that hada basis of $80,000. When your spouse died, half the FMV of thecommunity interest was includible in your spouse's estate. The FMV ofthe community interest was $100,000. The basis of your half of theproperty after the death of your spouse is $50,000 (half of the$100,000 FMV). The basis of the other half to your spouse's heirs isalso $50,000. For more information about community property, see Publication 555,Community Property.