Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 12

Basis of Property

The basis of property—tangible personal property, intangible property, or real property—is important because it is used to help determine the amount of any gain or loss when property is disposed of or sold. Basis is also used to calculate depreciation, amortization, and depletion.

The rules for basis depend on the nature of the property and how the property is acquired, such as by purchase or by gift.

Basis also can be adjusted for various reasons while the taxpayer owns the property.

Knowing how basis is determined is essential to understanding how the sale of property generates gains and losses and how to report these gains and losses (Chapter 13). IRS Pub. 551, Basis of Assets, provides more information about basis.

What Is Basis?

A taxpayer's basis in property reflects his or her investment in that property. For example, if a taxpayer purchases a car for $25,000, his basis in the car is $25,000. If the car is a personal vehicle, the taxpayer's basis generally remains $25,000. However, if the same vehicle is used in a business, the taxpayer depreciates the vehicle, which reduces his basis in the vehicle by the amount of the depreciation. The “adjusted basis” is original basis plus or minus adjustments that reflect certain events, as described later in this chapter.

Basis is the starting point that is used to figure:

• Gain or loss on the sale or other disposition of property
• Casualty losses
• Depreciation, amortization, and depletion

The taxpayer ...