5.16 Unadjusted Basis of Your Property
To determine your tax cost for property, first find in the following section the unadjusted basis of the property, and then increase or decrease that basis (5.20).
Filing Tip
Property you bought.
Unadjusted basis is your cash cost plus the value of any property you gave to the seller. If you assumed a mortgage or bought property subject to a mortgage, the amount of the mortgage is part of your unadjusted basis.
Purchase expenses are included in your cost, such as commissions, title insurance, recording fees, survey costs, and transfer taxes.
If you buy real estate and reimburse the seller for property taxes he or she paid that cover the period after you took title, and you include the payment in your itemized deduction for real estate taxes (16.4), do not add the reimbursement to your basis. However, if you did not reimburse the seller, you must reduce your basis by the seller’s payment.
If at the closing you also paid property taxes attributable to the time the seller held the property, you add such taxes to basis.
Property obtained for services.
If you paid for the property by providing services, the value of the property, which is taxable compensation, is also your adjusted basis.
Property received in taxable exchange.
Technically, your unadjusted basis for the new property is the fair market value of the surrendered property at the time of exchange. In practice, however, the basis usually is equal to the fair market value of the property received. See below for tax-free exchanges.
Property received in a tax-free exchange.
The computation of basis is made on Form 8824. If the exchange is completely tax free (6.1), your basis for the new property will be your basis for the property you gave up in the exchange, plus any additional cash and exchange expenses you paid. If the exchange is partly nontaxable and partly taxable because you received “boot” (6.3), your basis for the new property will be your basis for the property given up in the exchange, decreased by any cash received and by any liabilities on the property you gave up, and increased by any cash and exchange expenses you paid, liabilities on the property you received, and gain taxed to you on the exchange. Gain is taxed to the extent you receive “boot,” in the form of cash or a transfer of liabilities that exceeds the liabilities assumed in the exchange; see 6.3 for a discussion on taxable boot. The Example in 6.3 illustrates the basis computation.
Property received from a spouse or former spouse.
Tax-free exchange rules apply to property transfers after July 18, 1984, to a spouse, or to a former spouse where the transfer is incident to a divorce (6.7). The spouse receiving the property takes a basis equal to that of the transferor. Certain adjustments may be required where a transfer of mortgaged property is made in trust.
Planning Reminder
If you received property before July 19, 1984, under a prenuptial agreement in exchange for your release of your dower and marital rights, your basis is the fair market value at the time you received it.
| Basis of old property | $20,000 |
| Less: Cash received | 5,000 |
| 15,000 | |
| Plus: Gain recognized | 5,000 |
| Basis of new property | $20,000 |
New residence purchased under tax deferral rule of prior law.
If you sold your old principal residence and bought a qualifying replacement under the prior law deferral rules, your basis for the new house is what you paid for it, less any gain that was not taxed on the sale of the old residence.
Property received as a trust beneficiary.
Generally, you take the same basis the trust had for the property. But if the distribution is made to settle a claim you had against the trust, your basis for the property is the amount of the settled claim.
If you received a distribution in kind for your share of trust income before June 2, 1984, the basis of the distribution is generally the value of the property to the extent allocated to distributable net income. For distributions in kind after June 1, 1984, in taxable years ending after June 1, 1984, your basis is the basis of the property in the hands of the trust. If the trust elects to treat the distribution as a taxable sale, your basis is generally fair market value.
Property acquired with involuntary conversion proceeds.
If you acquire replacement property with insurance proceeds from destroyed property, or a government payment for condemned property, basis is the cost of the new property decreased by deferred gain (18.23). If the replacement property consists of more than one piece of property, basis is allocated to each piece in proportion to its respective cost.
| Cost of the new building | $150,000 |
| Less: deferred gain | 50,000 |
| Basis | $100,000 |