Basis Other Than Cost — 2025 Publ 225 (PDF)

There are times when you cannot use cost as basis. In these situations, the FMV or the adjusted basis of property may be used. Examples are discussed next.

Property changed from personal to busi- ness or rental use. When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business.

The basis for depreciation is the lesser of:

The FMV of the property on the date of the change, or
Your adjusted basis on the date of the change.

If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. The basis for figuring a gain is your adjusted basis in the property when you sell the property. Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Then make adjustments (increases and decreases) for the period after the change in the property’s use, as discussed earlier under Adjusted Basis .

Property received for services. If you receive property for services, include the property’s FMV in income. The amount you include in income becomes your basis. If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary.

Example. Rocco Stowsa is an accountant and also operates a farming business. Rocco agreed to do some accounting work for a neighbor in exchange for a dairy cow. The accounting work and the cow are each worth $1,500. Rocco must include $1,500 in income for the accounting services. Rocco’s basis in the cow is $1,500.

Taxable Exchanges

A taxable exchange is one in which the gain is taxable, or the loss is deductible. A taxable gain or deductible loss is also known as a recognized gain or loss. A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange.

Example. You trade a tract of farmland with an adjusted basis of $20,000 for a tractor that has an FMV of $60,000. You must report a taxable gain of $40,000 for the land. The tractor has a basis of $60,000.

Nontaxable Exchanges

A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. A nontaxable gain or loss is also known as an unrecognized gain or loss. If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred.

Involuntary Conversions

If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property.

Similar or related property. If the replacement property is similar or related in service or use to the converted property, the replacement

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property’s basis is the same as the old property’s basis on the date of the conversion. However, make the following adjustments.

Decrease the basis by the following amounts.

a. Any loss you recognize on the invol untary conversion.

b. Any money you receive that you do

not spend on similar property.

Increase the basis by the following amounts.

a. Any gain you recognize on the invol untary conversion.

b. Any cost of acquiring the replacement

property.

Money or property not similar or related. If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion.

Allocating the basis. If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs.

Basis for depreciation. Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. For more information, see Figuring the Deduction for Property Acquired in a Non- taxable Exchange under Figuring Depreciation Under MACRS in chapter 7.

For more information about involuntary conversions, see chapter 11.

Like-Kind Exchanges

Generally, if you exchange real property you use in your business or hold for investment solely for other business or investment real property of a like kind, you do not recognize the gain or loss from the exchange. If you also receive non-like-kind property or money as part of the exchange, you do recognize gain, but only to the extent of the value of the other property or money you received in the exchange, and you do not recognize any loss.

For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. There must also be an exchange of like-kind property. For more information, see Like-Kind Exchanges in chap- ter 8.

The basis of the property you receive is generally the same as the adjusted basis of the property you gave up.

Example. You trade farmland for another larger tract of farmland. Your adjusted basis in your farmland is $110,000. The FMV of the new tract of farmland is $150,000. Because this is a nontaxable exchange, you do not recognize any

gain and your basis in the farmland you receive is $110,000, the same as the adjusted basis in the farmland you exchanged.

Note. An exchange of personal property, such as machinery or equipment, does not qualify as a like-kind exchange.

Exchange expenses. Exchange expenses are generally the closing costs that you pay. They include such items as brokerage commissions, attorney fees, and deed preparation fees. Add them to the basis of the like-kind property you receive.

Property plus cash. If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is increased by the money you paid.

Example. Assume the same facts from the previous example except you pay an additional $20,000 in cash. Your adjusted basis in the newly acquired farming real estate is $130,000 ($110,000 adjusted basis of your old farmland plus the $20,000 cash you paid).

Special rules for related persons. If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related-party rules. Each person reports it on the tax return filed for the year in which the later disposition occurred. If this rule applies, the basis of the property received in the original exchange will be its FMV. For more information, see chapter 8.

Basis for depreciation. Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. For more information, see Figuring the Deduction for Property Acquired in a Nontaxa- ble Exchange under Figuring Depreciation Un- der MACRS in chapter 7.

Partially Nontaxable Exchanges

A partially nontaxable exchange is an exchange in which you receive property that is not a like-kind property or money in addition to a like-kind property. The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments.

Decrease the basis by the following amounts.

a. Any money you receive.

b. Any loss you recognize on the ex change.

Increase the basis by the following amounts.

a. Any additional costs you incur.

b. Any gain you recognize on the ex change.

If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange.

Example. You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. You realize a gain of $40,000. This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Include your gain in income (recognize gain) only to the extent of the cash received. Your basis in the land you received is figured as follows.

Basis of land traded . . . . . . . . . . . . .$100,000 Minus: Cash received (adjustment 1a) . . . . . . . . . . . . . . . . . . . . . . . . . . ^{− 30,000}

$70,000 Plus: Gain recognized (adjustment 2b) . . . . . . . . . . . . . . . . . . . . . . . . . . ^{+ 30,000}

Basis of land received . . . . . . . $100,000

Allocation of basis. If you receive like-kind and unlike properties in the exchange, 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 of the like-kind property.

Example. You trade a tract of farmland with an adjusted basis of $100,000 for another tract of farmland that has an FMV of $92,500. You also receive $4,000 in cash and a pickup truck with an FMV of $11,000. Since only real property qualifies for like-kind exchange treatment, your receipt of the truck and cash means you must recognize gain on the exchange. You realize a gain of $7,500. This is the sum of the FMV of the tract of farmland you receive, the FMV of the truck you receive, and the cash you receive, minus the adjusted basis of the farmland you traded ($92,500 + $11,000 + $4,000 – $100,000). You include in income (recognize) all $7,500 of the gain because it is the lesser of the realized gain ($7,500) and the sum of the FMV of the unlike property and the cash received ($15,000). Your basis in the properties you received is figured as follows.

Adjusted basis old farmland . . . . . . $100,000 Minus: Cash received (adjustment 1a) . . . . . . . . . . . . . . . . . . . . . . . . . . - 4,000

$96,000 Plus: Gain recognized (adjustment 2b) . . . . . . . . . . . . . . . . . . . . . . . . . . + 7,500

Total basis of properties received . . . . . . . . . . . . . . . . ^$103,500

Allocate the basis of $103,500 first to the unlike property, the truck ($11,000). This is the truck’s FMV. The rest ($92,500) is the basis in the farmland.

Sale and Purchase

If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange.

Example. You own farmland with a barn. The properties have a combined adjusted basis of $70,000, and an FMV of $150,000. You are

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interested in another tract of farmland with a larger barn owned by your neighbor who is interested in exchanging the property with you. The total FMV of your neighbor’s farmland and barn is $200,000. You want the new barn to have a larger basis for depreciation, so you arrange to sell your old farmland and barn to your neighbor for $150,000. Your neighbor then sells the farmland and barn to you for $200,000. However, you are treated as having exchanged the old property for the new property because the sale and purchase are reciprocal and mutually dependent. Your basis in the new property is $120,000 ($50,000 cash paid plus $70,000 adjusted basis in your old property), which must be allocated between the farmland and the barn.

Property Received as a Gift

To figure the basis of property you receive as a gift, you must know the donor’s adjusted basis (defined earlier) just before it was given to you. You must also know its FMV at the time it was given to you and any gift tax paid on it.

FMV equal to or greater than donor’s adjus- ted basis. If the FMV of the property is equal to or greater than the donor’s adjusted basis, your basis is the donor’s adjusted basis when you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.

Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor’s adjusted basis) by any required adjustments to basis while you held the property. See Adjusted Ba- sis , earlier.

If you received a gift during the tax year, increase your basis in the gift (the donor’s adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid by the following fraction.

Fair market value . . . . . . . . . . . . . . . . . . $50,000 Minus: Adjusted basis . . . . . . . . . . . . . . - 20,000

Net increase in value . . . . . . . . . . . . . . . $30,000

Gift tax paid . . . . . . . . . . . . . . . . . . . . . $6,220 Multiplied by ($30,000 ÷ $31,000) . . . . . . × 0.97

Gift tax due to net increase in value . . . . . $6,033 Adjusted basis of property to your

mother . . . . . . . . . . . . . . . . . . . . . . . + 20,000

Your basis in the property . . . . . . . $26,033

your former spouse if the transfer is incident to divorce. However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred.

The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer.

For more information, see Property Settle- ments in Pub. 504, Divorced or Separated Individuals.

Inherited Property

Your basis in property you inherited from a decedent is generally one of the following.

The FMV of the property at the date of the decedent’s death. If you filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, you can use its appraised value.
The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. For information on the alternate valuation, see the Instructions for Form 706.
The decedent’s adjusted basis in land to the extent of the value that is excluded from the decedent’s taxable estate as a qualified conservation easement.

If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.

Special-use valuation method. Under certain conditions, when a person dies, the executor or personal representative of that person’s estate may elect to value qualified real property at other than its FMV. If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate.

If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Post-death appreciation is the property’s FMV on the date of distribution minus the property’s FMV either on the date of the individual’s death or on the alternate valuation date. Figure all FMVs without regard to the special-use valuation.

You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. The tax also does not apply if you transfer the property to a member of your family and certain requirements are met.

Net increase in value of the gift

Amount of the gift

The net increase in value of the gift is the FMV of the gift minus the donor’s adjusted basis. The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift.

Example. In 2025, you received a gift of property from your mother that had an FMV of $50,000. Your mother’s adjusted basis was $20,000. The amount of the gift for gift tax purposes was $31,000 ($50,000 minus the $19,000 annual exclusion). Your mother paid a gift tax of $6,220. Your basis, $26,033, is figured as follows.

Note. If you received a gift before 1977, your basis in the gift (the donor’s adjusted basis) includes any gift tax paid on it. However, your basis cannot exceed the FMV of the gift when it was given to you.

FMV less than donor’s adjusted basis. If the FMV of the property at the time of the gift is less than the donor’s adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Your basis for figuring gain is the donor’s adjusted basis plus or minus any required adjustments to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. (See Adjusted Ba- sis, earlier.)

If you use the donor’s adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property.

Example. You received farmland as a gift from your parents when they retired 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 received the land, no events occurred that would increase or decrease your basis.

If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor’s adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at 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 have neither gain nor loss. For instance, if the sales price was $90,000 and 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 figure a 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 figuring any depreciation, depletion, or amortization deductions is the same as the donor’s adjusted basis plus or minus any required adjustments to basis while you hold the property. For more information on depreciation, depletion or amortization, see chapter 7.

Property Transferred From a Spouse

The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse’s adjusted basis. The same rule applies to a transfer by

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You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent’s death until the date of payment of the additional estate tax. If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent’s death or the alternate valuation date. The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax.

You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that:

Contains your (and the estate’s) name, address, and taxpayer identification number;
Identifies the election as an election under section 1016(c) of the Internal Revenue Code;
Specifies the property for which you are making the election; and
Provides any additional information required by the Form 706-A instructions.

For more information, see Form 706; Form 706-A; and the related instructions.

Property Distributed From a Partnership or Corporation

The following rules apply to determine a partner’s basis and a shareholder’s basis in property distributed respectively from a partnership to the partner with respect to the partner’s interest in the partnership and from a corporation to the shareholder with respect to the shareholder’s ownership of stock in the corporation.

Partner’s basis. Unless there is a complete liquidation of a partner’s interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. However, the basis of the property to the partner cannot be more than the adjusted basis of their interest in the partnership reduced by any money received in the same transaction. For more information, see Partner’s Basis for Distributed Property in Pub. 541, Partnerships.

Shareholder’s basis. The basis of property distributed by a corporation to a shareholder is its FMV. For more information about corporate distributions, see Distributions to Shareholders in Pub. 542, Corporations.