Example. You have real property held for
productive use in your trade or business. Its ad-
justed basis is $500,000 and its FMV is
$750,000. You're interested in replacing the
property with real estate containing a building
worth $900,000. Ordinarily, you would swap
properties and pay the $150,000 difference in
FMVs. Your basis would then be $650,000
($150,000 cash paid plus $500,000 adjusted
basis in your old property).
You want your new real property to have a
larger basis for depreciation, so you arrange to
sell your old property to the other party. You
then buy the new property from that individual
for $900,000. However, if the sale and pur-
chase are reciprocal and mutually dependent,
you're treated as having exchanged your old
property for the new property. In that case, your
basis for depreciation for the new property is
$650,000, the same as if you had exchanged
the old property for the new property.
Partial Business Use of Property
If you have real property, a portion of which is
used for business and a portion of which is
used for personal use, and you exchange it in a
nontaxable exchange for real property to be
used wholly or partly in your business, the basis
of the property you receive is figured separately
for the business and nonbusiness use parts.
The part of the property used for business is an
exchange of like-kind property. The per-
sonal-use part of the property is property on
which gain is recognized.
Figure the adjusted basis of each part of the
property by taking into account any adjustments
to basis. Deduct the depreciation you took or
could have taken from the adjusted basis of the
business part. Then figure the amount realized
for your property and allocate it to the business
and nonbusiness parts of the property.
You're deemed to have received, in ex-
change for the nonbusiness part, an amount
equal to its FMV on the date of the exchange.
The basis of the property you acquired is the to-
tal basis of the property transferred (adjusted to
the date of the exchange), increased by any
gain recognized on the nonbusiness part.
If the nonbusiness part of the property
transferred is your main home, you
may qualify to exclude from income all
or part of the gain on that part. For more infor-
mation, see Pub. 523.
Property Transferred
From a Spouse
The basis of property transferred to you or
transferred in trust for your benefit by your
spouse (or former spouse if the transfer is inci-
dent to divorce) is the same as your spouse's
adjusted basis. However, adjust your basis for
any gain recognized by your spouse or former
spouse on property transferred in trust. This
rule applies only to a transfer of property in trust
in which the liabilities assumed, plus the liabili-
ties to which the property is subject, are more
than the adjusted basis of the property transfer-
red.
If the property transferred to you is a series
E, series EE, or series I U.S. savings bond, the
transferor must include in income the interest
accrued to the date of transfer. Your basis in the
bond immediately after the transfer is equal to
the transferor's basis increased by the interest
income includible in the transferor's income. For
more information on these bonds, see Pub.
550.
At the time of the transfer, the transferor
must give you the records necessary to deter-
mine the adjusted basis and holding period of
the property as of the date of transfer.
For more information, see Pub. 504, Di-
vorced or Separated Individuals.
Property
Received as a Gift
To figure the basis of property you receive as a
gift, you must know its adjusted basis (defined
earlier) to the donor just before it was given to
you, its FMV at the time it was given to you, and
any gift tax paid on it.
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 ba-
sis depends on whether you have a gain or a
loss when you dispose of the property. Your ba-
sis for figuring gain is the same as the donor's
adjusted basis plus or minus any required ad-
justment 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 ad-
justment to basis while you held the property
(see Adjusted Basis, earlier).
If you use the donor's adjusted basis for fig-
uring a gain and get a loss, and then use the
FMV for figuring a loss and have a gain, you
have neither gain nor loss on the sale or dispo-
sition of the property.
Example. You received an acre of land as
a gift. At the time of the gift, the land had an
FMV of $8,000. The donor's adjusted basis was
$10,000. After you received the land, no events
occurred to increase or decrease your basis. If
you sell the land for $12,000, you'll have a
$2,000 gain because you must use the donor's
adjusted basis ($10,000) at the time of the gift
as your basis to figure gain. If you sell the land
for $7,000, you'll have a $1,000 loss because
you must use the FMV ($8,000) at the time of
the gift as your basis to figure a loss.
If the sales price is between $8,000 and
$10,000, you have neither gain nor loss. For in-
stance, if the sales price was $9,000 and you
tried to figure a gain using the donor's adjusted
basis ($10,000), you would get a $1,000 loss. If
you then tried to figure a loss using the FMV
($8,000), you would get a $1,000 gain.
Business property. If you hold the gift as
business property, your basis for figuring any
depreciation, depletion, or amortization deduc-
tion is the same as the donor's adjusted basis
plus or minus any required adjustments to basis
while you hold the property.
FMV Equal to or More Than
Donor's Adjusted 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 at the time you re-
ceived 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 deduc-
tions on business property, you must increase
or decrease your basis by any required adjust-
ments to basis while you held the property. See
Adjusted Basis, earlier.
Gift received before 1977. If you received a
gift before 1977, increase your basis in the gift
(the donor's adjusted basis) by any gift tax paid
on it. However, don't increase your basis above
the FMV of the gift at the time it was given to
you.
Example 1. You were given a house in
1976 with an FMV of $21,000. The donor's ad-
justed basis was $20,000. The donor paid a gift
tax of $500. Your basis is $20,500, the donor's
adjusted basis plus the gift tax paid.
Example 2. If, in Example 1, the gift tax
paid had been $1,500, your basis would be
$21,000. This is the donor's adjusted basis plus
the gift tax paid, limited to the FMV of the house
at the time you received the gift.
Gift received after 1976. If you received a gift
after 1976, increase your basis in the gift (the
donor's adjusted basis) by the part of the gift tax
paid on it that is due to the net increase in value
of the gift. Figure the increase by multiplying the
gift tax paid by a fraction. The numerator of the
fraction is the net increase in value of the gift,
and the denominator is the amount of the gift.
The net increase in value of the gift is the
FMV of the gift less the donor's adjusted basis.
The amount of the gift is its value for gift tax pur-
poses after reduction by any annual exclusion
and marital or charitable deduction that applies
to the gift. For information on the gift tax, see
Pub. 559, Survivors, Executors, and Adminis-
trators.
Example. In 2022, you received a gift of
property from your mother that had an FMV of
$50,000. Her adjusted basis was $20,000. The
amount of the gift for gift tax purposes was
$34,000 ($50,000 minus the $16,000 annual
exclusion). She paid a gift tax of $6,880. Your
basis, $26,054, is figured as follows:
Fair market value
................. $50,000
Minus: Adjusted basis .............. 20,000
Net increase in value ............... $30,000
Gift tax paid ..................... $6,880
Multiplied by ($30,000 ÷ $34,000) ...... 0.88
Gift tax due to net increase in value ..... $6,054
Adjusted basis of property to your
mother .......................
20,000
Your basis in the property ....... $26,054
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Publication 551 (December 2022) Page 9