Calculating basis of property can be complex, so I\u2019ve broken it into three pieces. In this article, I\u2019ll cover basis of converted property, property acquired incident to divorce and property acquired by gift.<\/p>\n
Converted Property<\/strong><\/p>\n Basis of depreciation of property that is converted from personal to business use is the lesser of:<\/p>\n Please note that basis for the sale of converted property at a gain is cost basis.<\/p>\n If sold at a loss, basis is the lower of:<\/p>\n If sold to a related party at a loss, the loss is not deductible, but it reduces the gain realized when the related party eventually sells the property. It does not increase depreciable basis.<\/p>\n Property Acquired Incident to Divorce<\/strong><\/p>\n No gain or loss is recognized on transfers between spouses at any time, even if the transfer is in exchange for cash or other consideration.<\/p>\n Basis in the property is the same as the former spouse\u2019s basis; the holding period begins at the time the former spouse acquired the property.<\/p>\n For example, Russell and Kari bought a house for $250,000 and made no improvements to the property. After owning the home for five years, they divorce. The fair market value at the time of the divorce is $300,000. The divorce decree states that Kari keeps the house but has to pay $50,000 to Russell to buy him out. Her basis is still $250,000; the $50,000 that she paid to Russell does not increase her basis. Russell does not have to pay tax on the money either because it was a transfer incident to divorce.<\/p>\n Property Acquired by Gift<\/strong><\/p>\n Tax basis of property received by a U.S. person as a gift is the same as the donor\u2019s tax basis in the property. If the fair market value of the property exceeds this tax basis and the donor pays gift tax, the tax basis is increased by the amount of the gift tax. This adjustment applies only if the recipient sells the property at a gain.<\/p>\n Basis of property received as a gift is generally the same as the basis of the preceding owner who did not acquire the property by gift. However, upon the sale of gifted property at a loss, the basis is the lower of the adjusted basis or the fair market value at the time of the gift. Sometimes, there is no gain or loss because the selling price is less than the basis for gain and more than the basis for loss.<\/p>\n The holding period for the recipient includes the donor\u2019s holding period.<\/p>\n Here are some examples:<\/p>\n\n
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