Other Basis

Other basis usually refers to basis that is determined by the way you received the property. For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. If you acquired property in this or some other way, see Pub. 551 to determine your basis.

Property changed from personal use. If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following.

1. The FMV of the property on the date of the change in use.

2. Your original cost or other basis adjusted as follows.

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a. Increased by the cost of any permanent improve ments or additions and other costs that must be added to basis.

b. Decreased by any deductions you claimed for

casualty and theft losses and other items that reduced your basis.

Example. Several years ago, Nia paid $160,000 to have a home built on a lot that cost $25,000. Before changing the property to rental use last year, Nia paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Land is not depreciable, so Nia includes only the cost of the house when figuring the basis for depreciation.

The adjusted basis in the house when Nia changed its use was $178,000 ($160,000 + $20,000 − $2,000). On the same date, the property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. The basis for depreciation on the house is the FMV on the date of change ($165,000) because it is less than Nia’s adjusted basis ($178,000).

Property acquired in a nontaxable transaction. Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. This is referred to as the “carryover basis.” Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or an involuntary conversion. See Like-kind exchanges and involuntary conver- sions under How Much Can You Deduct? in chapter 3, and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4.

There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or an involuntary conversion when the property is contained in a general asset account. See How Do You Use General As- set Accounts? in chapter 4.