Basis of assets

Why basis matters

Basis is your investment in property for tax purposes. It is the number you subtract from the amount realized to find gain or loss, and the number you recover through depreciation and amortization (Publication 551). Almost every property question on REG starts here, so the blueprint gives basis its own group: the basis of a business asset bought for cash or debt, of property converted from personal to business use, of gifts and inheritances, of stock acquired in a wash sale, and of intangibles such as organization, start-up and loan costs (2026 Blueprints, Area III, Group A).

Two ideas run through the whole lesson:

• Original basis depends on how you acquired the property: usually cost, but sometimes the donor's basis, a value at death, or a lesser-of figure.
• Adjusted basis is original basis plus capital additions and minus capital recoveries over time.

Cost basis (IRC §1012)

The basis of property is its cost (IRC §1012(a)). Cost is what you pay in cash, debt obligations, other property or services, and it includes the costs of getting the asset ready for use (Publication 551):

• sales tax, freight, installation and testing;
• excise taxes, revenue stamps and recording fees;
• legal and accounting fees that must be capitalized;
• debt you assume, or take the property subject to: buy a building for $20,000 cash plus an $80,000 mortgage and your basis is $100,000.

For real estate, settlement costs are added too: abstract and title-search fees, legal fees for the contract and deed, surveys, transfer taxes, recording fees, owner's title insurance, charges for installing utility service, and amounts the seller owed that you agree to pay, such as back taxes or the seller's commission (Publication 551).

Not part of basis: casualty insurance premiums, rent or utilities for occupancy before closing (deductible if the property is used in business), amounts placed in escrow, and every cost of getting a loan: points, loan origination and assumption fees, mortgage insurance premiums, credit reports and a lender's appraisal. Loan costs on business property are capitalized separately and deducted over the term of the loan (Publication 551).

Apportioned real property taxes. When real property is sold mid-year, the tax for the part of the year before the date of sale is treated as imposed on the seller, and the tax from the date of sale onward on the buyer (IRC §164(d)(1)). If the buyer pays the seller's share and is not reimbursed, that amount is added to the buyer's basis and is not deductible; the buyer's own share is a deductible tax, not basis (IRC §1012(b); Publication 551).

Lump-sum purchases. When you buy land and a building for one price, allocate the cost by relative fair market value (assessed values may be used if FMV is uncertain). Only the building is depreciable (Publication 551).

Worked example: a warehouse

Linden Supply LLC buys a warehouse on April 1, 2026. The 2026 property tax of $7,300 is billed in December and Linden pays all of it. An appraisal values the land at $120,000 and the building at $480,000.

Item	Amount	Treatment
Cash paid to the seller	$200,000	Basis
Seller's mortgage assumed	$340,000	Basis
Title search and legal fees for the deed	$4,000	Basis
Recording fees and transfer tax	$2,500	Basis
Owner's title insurance	$1,500	Basis
Seller's share of 2026 tax: 90 days (January 1 to March 31) ÷ 365 × $7,300	$1,800	Basis (paid for the seller, not reimbursed)
Linden's share: 275 days ÷ 365 × $7,300	$5,500	Deductible tax
Loan assumption fee	$1,200	Loan cost: amortized over the loan's term
First-year fire insurance premium	$2,400	Deductible business expense

Basis = $200,000 + $340,000 + $4,000 + $2,500 + $1,500 + $1,800 = $549,800. Land is 20% of total value ($120,000 ÷ $600,000), so land gets $109,960 and the depreciable building $439,840.

Adjusted basis (IRC §1016)

Basis is adjusted for items properly chargeable to capital account, and reduced for depreciation, amortization and depletion (IRC §1016(a)).

Increases	Decreases
Improvements with a useful life over one year (a new roof, an addition, central air)	Depreciation, amortization and depletion
Assessments for local improvements (sidewalks, roads, water connections)	Section 179 deduction and bonus depreciation
Legal fees to defend or perfect title; zoning costs	Casualty and theft loss deductions and insurance reimbursements
Cost of extending utility lines to the property	Nontaxable (return-of-capital) corporate distributions

(Publication 551.) Repairs that are currently deductible never go into basis.

Allowed or allowable. Basis is reduced by depreciation allowed, but never by less than the amount allowable (IRC §1016(a)(2)). A client who forgot to claim depreciation still has a lower basis.

Property converted from personal to business use

When a taxpayer starts renting out a former home, or begins using a personal car in a business, the property is treated as placed in service on the conversion date, and its basis for depreciation is the lesser of its fair market value or its adjusted basis at conversion (Treas. Reg. §1.168(i)-4(b)). The same lesser-of rule sets the basis for a loss on a later sale (Treas. Reg. §1.165-9(b)). The basis for gain is ordinary adjusted basis. The rule stops a taxpayer from deducting, as a business loss, a decline in value that happened while the property was personal.

Worked example: a home becomes a rental

Maya bought her home for $280,000 (land $70,000, house $210,000) and later added a $30,000 room. On June 1, 2026, she converts it to a rental, when it is worth $280,000 (land $80,000, house $200,000).

Measure	Computation	Amount
Adjusted basis at conversion	$280,000 + $30,000	$310,000 (house $240,000)
Depreciable basis of the house	Lesser of $200,000 FMV or $240,000	$200,000
Basis for loss (whole property)	Lesser of $280,000 FMV or $310,000	$280,000

After $20,000 of depreciation, her basis for gain is $290,000 and her basis for loss is $260,000. A sale for $300,000 gives a $10,000 gain; for $250,000, a $10,000 loss; for $275,000, neither gain nor loss.

Gifts (IRC §1015)

Carryover basis. A donee generally takes the donor's adjusted basis (IRC §1015(a)).

The dual-basis rule. If the property's FMV at the date of the gift is less than the donor's adjusted basis, then for figuring a loss the donee's basis is that FMV (IRC §1015(a)). So:

• sell above the donor's basis: gain, measured from the donor's basis;
• sell below the gift-date FMV: loss, measured from the FMV;
• sell in between: no gain and no loss (Publication 551).

Gift tax adjustment. For gifts after 1976, basis is increased by the gift tax paid that is attributable to the net appreciation: gift tax × (FMV − donor's basis) ÷ amount of the gift (IRC §1015(d)(1), (6)). The amount of the gift is its value after the annual exclusion and any marital or charitable deduction (Publication 551); the annual exclusion is $19,000 per donee for 2026 (Rev. Proc. 2025-32, §4.42). Basis can never be raised above FMV by this adjustment, and there is no adjustment for a gift that has not appreciated.

Holding period. When the donee uses the donor's basis, the donor's holding period tacks on (IRC §1223(2)). When the donee uses FMV to compute a loss, the holding period starts the day after the gift (Publication 550).

Gifts between spouses take the transferor's adjusted basis, with no dual-basis rule (IRC §1015(e); Publication 551).

Worked examples: gifts

A loss gift. Owen gives his niece stock with a basis of $40,000 and a gift-date FMV of $28,000.

Niece sells for	Basis used	Result
$45,000	$40,000 (donor's)	$5,000 gain; holding period includes Owen's
$22,000	$28,000 (FMV)	$6,000 loss; holding period starts after the gift
$33,000	Neither works	No gain or loss

An appreciated gift with gift tax. In 2026 Rosa gives her son land worth $69,000 with a basis of $44,000 and pays $6,000 of gift tax. The amount of the gift is $50,000 ($69,000 − $19,000 annual exclusion); net appreciation is $25,000. The basis increase is $6,000 × $25,000 ÷ $50,000 = $3,000, so the son's basis is $47,000.

Inherited property (IRC §1014)

Property acquired from a decedent takes a basis equal to its FMV at the date of death, or its value on the alternate valuation date if the executor elects it (IRC §1014(a)). The alternate date is six months after death, or the date of an earlier sale or distribution, and the election is allowed only if it reduces both the gross estate and the estate tax (IRC §2032(a), (c)).

• Holding period: always long-term, even if the heir sells within a year (IRC §1223(9)).
• Income in respect of a decedent (unpaid wages, a traditional IRA, sale proceeds a cash-method decedent had not collected) gets no step-up (IRC §1014(c); IRC §691).
• Appreciated property given to the decedent within one year of death that passes back to the donor or the donor's spouse keeps the decedent's adjusted basis (Publication 551).

Example. Dev inherits shares his mother bought for $12,000, worth $50,000 at her death and $46,000 six months later. Without the election his basis is $50,000; if the executor elects alternate valuation, it is $46,000. If Dev sells three months after the death for $53,000, the $3,000 gain (with no election) is long-term.

Wash sales (IRC §1091)

A loss on stock or securities is disallowed if, within a period beginning 30 days before and ending 30 days after the sale (61 days counting the sale date), the taxpayer buys, or contracts or takes an option to buy, substantially identical stock or securities (IRC §1091(a)). The loss is not lost, only deferred:

• the disallowed loss is added to the basis of the replacement shares (IRC §1091(d)); and
• the holding period of the old shares tacks onto the new ones (IRC §1223(3)).

A purchase by the taxpayer's spouse or controlled corporation counts. A purchase inside the taxpayer's IRA also triggers the rule, but then the disallowed loss is not added to any basis (Publication 550). If fewer shares are bought than sold, only the loss on that many shares is disallowed.

Example. On December 10, 2026, Lena sells 100 shares for $3,500 that cost $5,000 in June 2026, a $1,500 loss. On December 28 she buys 100 shares of the same stock for $3,700. The loss is disallowed; her new basis is $3,700 + $1,500 = $5,200, and her holding period runs from June. Had she bought only 60 shares for $2,220, $900 (60%) would be disallowed and added to their basis ($3,120), and $600 deducted.

Intangibles: organization, start-up, loan costs and purchased intangibles

Start-up costs (IRC §195) are costs of investigating or creating an active business that would be deductible if the business already existed, such as pre-opening advertising, travel, market surveys and training (Publication 583). Organizational costs (IRC §248) are costs incident to creating a corporation: legal work on the charter and bylaws, necessary accounting services, organizational meetings and state incorporation fees. Costs of issuing or selling stock are not organizational costs (Treas. Reg. §1.248-1(b)). Partnerships have a parallel rule for their organizational costs (Instructions for Form 4562).

Both follow the same formula, applied separately to each category:

1. Deduct up to $5,000 in the year business begins, reduced dollar for dollar by costs above $50,000 (so nothing is deductible at $55,000 or more).
2. Amortize the rest ratably over 180 months beginning with the month the business begins (IRC §195(b)(1); IRC §248(a)).

The election is deemed made unless the taxpayer elects to capitalize (Treas. Reg. §1.195-1(b); Treas. Reg. §1.248-1(c)).

Example. Bayside Bakery begins business on September 1, 2026, after $51,800 of start-up costs. Immediate deduction: $5,000 − $1,800 = $3,200. Remainder $48,600 ÷ 180 = $270 a month × 4 months = $1,080. 2026 deduction: $4,280.

Loan costs. Points, origination fees and similar costs of business borrowing are capitalized and deducted over the term of the loan (Publication 551). A $6,000 fee on a 5-year loan made July 1 gives $600 for the first six months.

Purchased section 197 intangibles. Goodwill, going-concern value, customer and supplier lists, government licenses and permits, franchises, trademarks and trade names, and (when acquired as part of buying a business) patents, copyrights and covenants not to compete are amortized ratably over 15 years (180 months) beginning with the month acquired (IRC §197(a), (d), (e)(4)). Most self-created intangibles are excluded, as is off-the-shelf software (IRC §197(c)(2), (e)(3)). Basis is the purchase price allocated to the intangible.

Common traps

• Adding loan costs, escrow deposits or casualty insurance to the basis of real estate.
• Deducting the seller's share of property tax that the buyer paid: it is basis.
• Depreciating land, or forgetting to split a lump-sum price between land and building.
• Using adjusted basis instead of the lesser-of figure for converted property.
• Forgetting the "no gain, no loss" zone for gifts and converted property.
• Adding the whole gift tax to basis instead of the net-appreciation share.
• Treating inherited property as short-term, or giving income in respect of a decedent a step-up.
• Reducing basis only by depreciation claimed rather than allowable.

Check yourself

1. A buyer pays $1,200 of property tax for the seller's part of the year and is not reimbursed. Basis or deduction? [Basis]
2. A donor's basis is $15,000 and the FMV at the gift is $10,000. The donee sells for $12,000. Gain or loss? [Neither]
3. Converted property: adjusted basis $150,000, FMV $130,000 (excluding land). Depreciable basis? [$130,000]
4. Shares sold at a $900 loss are bought back 20 days later for $4,000. Basis of the new shares? [$4,900]
5. Organizational costs of $50,900; the corporation begins business in July. Total first-year deduction? [$4,100 + $46,800 ÷ 180 × 6 = $5,660]
6. An heir sells inherited stock four months after the death. Short- or long-term? [Long-term]