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P1-U06 · Part 1 · Source cycle 2026-2027

Calculating Basis of Assets

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Asset Basis — Cost, Adjusted, and Special Basis Rules (2025)

Basis = What You "Paid" for Tax Purposes

Basis is the starting point for calculating gain/loss on sale or depreciation. Original basis is generally cost.

Cost Basis — What's Included

  • Purchase price
  • Sales tax
  • Freight/delivery charges
  • Installation and testing costs
  • Legal/accounting fees for the purchase
  • Unpaid property taxes assumed from seller
  • Major improvements (additions, renovations)
  • Assessments for local improvements (sidewalks, streets, water/sewer lines)

Adjusted Basis

Adjusted Basis = Original Cost + Improvements − Accumulated Depreciation − Prior §179 Deductions − Casualty/Theft Losses Already Deducted

Increases to basis: improvements, assessments, legal fees defending title, restoration costs after casualty.

Decreases to basis: depreciation, §179 expensing, casualty losses, energy credits, deferred gain from prior §1031 exchange.

Special Basis Rules

Inherited Property

Basis = FMV at date of death (or alternate valuation date, 6 months after death). This is the "step-up" (or step-down) in basis. No holding period requirement for long-term treatment (automatically long-term).

Exception: For decedents dying in 2010, executors could elect modified carryover basis instead.

Gift Property

If sold at GAIN: Basis = donor's adjusted basis ("carryover basis"). Holding period includes donor's period.

If sold at LOSS: Basis = LOWER of donor's adjusted basis OR FMV at gift date. Use FMV for loss calculation only.

If sale price is between basis and FMV: No gain, no loss recognized.

Gift tax paid: Basis increased by portion of gift tax attributable to appreciation.

Property Converted to Business/Rental Use

Basis for depreciation = LOWER of FMV or adjusted basis at conversion date. (This prevents depreciating unrealized losses while held for personal use.)

Divorce Transfers

Transfer of property between spouses or incident to divorce is generally tax-free. Recipient takes transferor's basis. No gain/loss recognized.

Like-Kind Exchange (§1031)

Basis of replacement property = Basis of old property + boot given − boot received + gain recognized − loss recognized.

Involuntary Conversion (§1033)

Replacement within 2 years (3 years for business real estate condemned): defer gain. Basis of new property = Cost of replacement − deferred gain.

Mortgaged Property

When property is acquired subject to a mortgage, the mortgage amount is included in the cost basis. If buying with a $200K down payment and assuming a $300K mortgage, basis = $500K.

Bargain Purchase (Employer-Employee)

If employer sells property to employee at below FMV, the difference is compensation income, and the employee's basis = amount paid + compensation recognized.

Stock Basis

  • Purchased: Cost + commissions
  • Multiple lots — sale identification: If taxpayer specifies which lot is sold (specific identification), that lot's basis applies. If not specified, FIFO (first-in, first-out) — earliest-purchased lot deemed sold first.
  • Stock split: Original basis allocated across new total shares
  • Stock dividend (no cash option): total basis unchanged; per-share basis decreases
  • Dividend reinvestment: Each purchase = separate lot with own basis
  • Mergers/acquisitions: Basis carries over proportionally for taxable exchanges
  • Digital assets (crypto, NFTs): treated as property. New Form 1099-DA (2025) — brokers must report gross proceeds for 2025 sales; basis reporting mandatory for covered securities starting 2026. If basis not reported on 1099-B/1099-DA, IRS may presume basis = $0.

Casualty-Adjusted Basis

After a deductible casualty: New basis = Original basis − insurance reimbursement − deductible casualty loss + cost of restoration to pre-casualty condition. (Example: $5,000 truck − $1,000 insurance − $500 casualty loss + $3,000 repairs = $6,500 new basis.)

Depreciation Note

Residential rental property depreciated over 27.5 years (straight-line, mid-month convention); non-residential/commercial over 39 years. Land is never depreciated. Depreciation reduces basis.

Home Basis After QPRI Exclusion

When COD is excluded under QPRI (§108(h)), basis in principal residence is REDUCED by the excluded amount (not below zero). This increases gain (or reduces loss) on future sale.