Introduction

Your basis is the amount of your investment in property for tax purposes. Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Also use basis to figure depreciation, amortization, depletion, and casualty losses. You may have property that you use for both business or the production of income purposes and for personal purposes. You must allocate the basis of this property based on its use. Only the basis allocated to the business or the production of business income use of the property can be depreciated.

Your original basis in property is adjusted (increased or decreased) by certain events. For example, if you make improvements to the property, increase your basis. If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis.

Keep accurate records of all items that affect the basis of your assets. For in

544

551

Topics This chapter discusses:

• Cost basis

• Adjusted basis

• Basis other than cost

Useful Items You may want to see:

Publication

544 Sales and Other Dispositions of Assets

551 Basis of Assets

32 Chapter 6 Basis of Assets Publication 225 (2025)

946 946 How To Depreciate Property amounts placed in escrow for the future payment of items such as taxes and insurance.

946 How To Depreciate Property

See How To Get Tax Help for information about getting publications and forms.

knowledge of all necessary facts. Sales of similar property on or about the same date may help in figuring the FMV of the property.

Group of assets acquired. If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation will generally be accepted.

Farming business acquired. If you buy a group of assets that make up a farming business, there are special rules you must use to allocate the purchase price among the assets. Generally, reduce the purchase price by any cash received. Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMVs and in a certain order. See Trade or Business Acquired under Allocating the Basis in Pub. 551 for more information. Also, see the examples under Sale of a Farm in chapter 8.

Transplanted embryo. If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Allocate the rest of the purchase price to the basis of the calf. Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense, however, you may be able to take a deduction for depreciation for the cow. The tax treatment for the basis of the cost allocated to the calf will depend on producer’s intent.

Example. You buy 10 embryo transplanted cows that are 5 months pregnant for $40,000. The FMV of 10 cows without implanted embryos is $12,000. Therefore, the 10 calves that were born from the embryo implanted cows would have a basis of $28,000 ($40,000 − $12,000) which is their basis at birth.

If you placed these calves in service in the breeding herd, their basis for depreciation is $28,000. If you decide to sell the calves instead of putting them in the breeding herd, you deduct their $28,000 basis from the sales proceeds.

Uniform Capitalization Rules

Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current year deduction. You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.

Any farming business that has average

TIP annual gross receipts of $31 million or

less for the 3 preceding tax years and is not a tax shelter is not subject to the uniform capitalization rules.

Generally, you are subject to the uniform capitalization rules if you do either of the following.