J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

5.20 How To Find Adjusted Basis

After determining the unadjusted cost basis for property (5.16–5.19), you may have to increase it or decrease it to find your adjusted basis, which is the amount used to figure your gain or loss on a sale (5.13).

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Court Decision

Improvements Covered by Note

In an unusual case, the owner of office condominiums financed substantial improvements to the units by giving promissory notes to a contracting company that he controlled. Before paying off the notes he sold the units. He included the cost of the improvements in basis to figure his gain on the sale, but the IRS, with the approval of a federal district court, held that this was improper. The court held that as a cash-basis taxpayer, he could not include the face amount of the notes in the basis of the condominiums until the notes were paid.

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1. Additions to basis. You add to unadjusted basis the cost of these items:

• All permanent improvements and additions to the property and other capital costs. Increase basis for capital improvements such as adding a room or a fence, putting in new plumbing or wiring, and paving a driveway. Also include capital costs such as the cost of extending utility service lines, assessments for local improvements such as streets, sidewalks, or water connections, and repairing your property after a casualty (for example, repair ...