Adjusted Basis Before figuring gain or loss on a sale, exchange, or otherdisposition of property, or figuring allowable depreciation,depletion, or amortization, you must usually make certain adjustments(increases and decreases) to the basis of the property. The result ofthese adjustments to the basis is the adjusted basis. Table 1. Examples of Increases and Decreases to 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. Rehabilitation expenses also increase basis. However, you mustsubtract any rehabilitation credit allowed for these expenses beforeyou add them to your basis. If you have to recapture any of thecredit, increase your basis by the amount of the recapture. 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 place theaddition or improvement in service. For more information, seePublication 946. Some items that increase the basis of property are listed next. The cost of extending utility service lines to theproperty. Legal fees, such as the cost of defending and perfectingtitle. Legal fees for obtaining a decrease in an assessment leviedagainst property to pay for local improvements. Zoning costs. The capitalized value of a redeemable ground rent. Assessments forLocal Improvements Add assessments for items such as streets and sidewalks to thebasis of the property assessed if they increase the value of theproperty. Do not deduct them as taxes. However, you can deduct astaxes assessments for maintenance, repair, or meeting interest chargeson the improvements. Example.If your city changes the street in front of your store into anenclosed pedestrian mall, and assesses you and other affectedlandowners for the cost of the conversion, add the assessment to yourproperty's basis. In this example, the amount of the assessment is adepreciable asset. Deducting vs. Capitalizing Costs Do not add to your basis costs you can deduct as current expenses.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. (SeeUniform Capitalization Rules, earlier.) The costs you can choose to deduct or to capitalize include thefollowing items. Carrying charges, such as interest and taxes, that you payto own property, except carrying charges that must be capitalizedunder the uniform capitalization rules. Research and experimentation costs. Intangible drilling and development costs for oil, gas, andgeothermal wells. Exploration costs for new mineral deposits. Mining development costs for a new mineral deposit. The costs of establishing, maintaining, or increasing thecirculation of a newspaper or other periodical. The cost of removing architectural and transportationbarriers to people with disabilities and the elderly. If you claim thedisabled access credit, you must reduce the amount you deduct orcapitalize by the amount of the credit. For more information about deducting or capitalizing costs, seechapter 11 in Publication 535. ERROR MSGDecreases to Basis Some items that reduce the basis of your property are listed next. The section 179 deduction. The deduction for clean-fuel vehicles and clean-fuel vehiclerefueling property. Nontaxable corporate distributions. Deductions previously allowed (or allowable) foramortization, depreciation, and depletion. Exclusion from income of subsidies for energy conservationmeasures. Credit for qualified electric vehicles. Gain from the sale of your home on which tax was postponed. Investment credit (part or all of credit) taken. Casualty and theft losses and insurancereimbursements. Certain canceled debt excluded from income. Rebates received from a manufacturer or seller. Easements. Gas-guzzler tax. Nice hôtelsTax credit or refund for buying a diesel-powered highwayvehicle. Adoption tax benefits. Some of these decreases to basis are discussed next. Casualty and Theft Losses If you have a casualty or theft loss, decrease the basis in yourproperty by the amount of any insurance or other reimbursement youreceive and by any deductible loss not covered by insurance. However,increase your basis by amounts you spend after a casualty to restorethe damaged property. For more information on casualty and theftlosses, see Publication 547, Casualties, Disasters, and Thefts. Easements The amount you receive for granting an easement is generallyconsidered 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. Credit for QualifiedElectric Vehicles five star hotel in Frankfurt am MainIf 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 15in Publication 535. Gas-Guzzler Tax 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 firstsale for ultimate use. This rule also applies to someone who laterbuys the car and begins using it not more than 1 year after theoriginal sale for ultimate use. If the car is imported, the one-yearperiod begins on the date of entry or withdrawal of the car from thewarehouse if that date is later than the date of the first sale forultimate use. Diesel-Powered Vehicle If you received an income tax credit or refund for a diesel-poweredhighway vehicle that you purchased before August 21, 1996, reduce yourbasis 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 costof business property, decrease the basis of the property by thededuction. For more information about the section 179 deduction, seePublication 946. Deduction for Clean-Fuel Vehicles and Clean-Fuel VehicleRefueling Property If you take the deduction for clean-fuel vehicles or clean-fuelvehicle refueling property, you must decrease the basis of theproperty by the amount of the deduction. For more information on thesedeductions, see chapter 15 in Publication 535. Exclusion from Income of Subsidies for Energy ConservationMeasures If you received a subsidy from a public utility company for thepurchase or installation of any energy conservation measure for adwelling unit, you can exclude it from income. Reduce the basis of theproperty for which you received the subsidy by the excluded amount.For more information on this subsidy, see Publication 525. Depreciation Decrease the basis of your property by the depreciation youdeducted or could have deducted on your tax returns under the methodof depreciation you selected. If you took less depreciation than youcould have under the method you selected, decrease the basis by theamount you could have taken under that method. If you did not take adepreciation deduction, then make adjustments to basis fordepreciation you could have taken. If you deducted more depreciation than you should have, decreaseyour basis as follows. Decrease it by an amount equal to thedepreciation you should have deducted, as well as by the part of theexcess depreciation you deducted that actually reduced your taxliability for any year. 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. For information on figuring depreciation, see Publication 946. If you are claiming depreciation on a car you use in your trade orbusiness, see Publication 463. If the car is not used more than 50%for business during the tax year, you may have to recapture excessdepreciation. Include the excess depreciation in your gross income andadd it to your basis in the property. For information on thecomputation of excess depreciation, see chapter 4 in Publication 463. Canceled Debt Excludedfrom Income Belgium HotelsIf 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 any indebtedness for whichyou are liable or which attaches to property you hold. You can excludeyour canceled debt from income in the following situations. The cancellation takes place in a title 11 bankruptcy caseor when you are insolvent. The canceled debt is qualified farm debt. The canceled debt is qualified real property businessindebtedness (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 andnondepreciable property. However, for situation (3), you mustreduce the basis of your depreciable property by the excluded amount. For more information on canceled debt in a bankruptcy case orduring insolvency, see Publication 908, Bankruptcy Tax Guide.For more information on canceled debt that is qualified farmdebt, see chapter 4 in Publication 225. For more information oncanceled debt that is qualified real property business debt, seechapter 5 in Publication 334, Tax Guide for Small Business. Gain from Sale of Home on Which Tax Was Postponed 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 amount of thepostponed gain. For more information on the rules for the sale of ahome, see Publication 523. Adoption Tax Benefits If you claim an adoption credit for the cost of improvements thatyou added to the basis of your home, decrease the basis of your homeby the credit allowed. This also applies to amounts that you receivedunder an employer's adoption assistance program and excluded fromincome. For more information on these benefits, see Publication 968,Tax Benefits for Adoption. Example In January 1994, you paid $80,000 for real property to be used as afactory. You also paid commissions of $2,000 and title search andlegal fees of $600. You allocated the total cost of $82,600 betweenthe land and the building--$10,325 for the land and $72,275 forthe building. Immediately, you spent $20,000 in remodeling thebuilding before you placed it in service. You were alloweddepreciation of $14,526 for the years 1994 through 1998. In 1997 youhad a casualty loss that was not covered by insurance of $5,000 on thebuilding from a fire. You claimed this loss as a deduction and spent$5,500 to repair the fire damages. The adjusted basis of the buildingon January 1, 1999, is figured as follows: Original cost of building, including fees andcommissions $72,275 Adjustments to basis: Add:   Improvements 20,000   Repair of fire damage      5,500 $97,775 Subtract:  Depreciation $14,526  Deducted casualty loss      5,000     19,526 Adjusted basis on January 1, 1999 $78,249 The basis of the land, $10,325, remains unchanged. It is notaffected by any of the above adjustments, which affect only the basisof the building.