Before figuring any gain or loss on a sale, exchange, or other disposition of property, or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the basis of the property. The result of these adjustments to the basis is the adjusted basis.

Table 14-1 Examples of Adjustments to Basis

Increases to Basis

Increase the basis of any property by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year and amounts spent after a casualty to restore the damaged property. Other items added to the basis of property include the cost of extending utility service lines to the property and legal fees, such as the cost of defending and perfecting title.

Improvements. Add the cost of improvements to your basis in the property if they increase the value of property, lengthen its life, or adapt it to a different use. For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway.

Assessments for local improvements. Add assessments for improvements, such as streets and sidewalks, to the basis of the property assessed if they increase the value of the property. Do not deduct them as taxes. However, you can deduct as taxes assessments you pay for maintenance or repair or to meet interest charges on the improvements.

Example. Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Add the assessment to your property's basis. In this example, the assessment is a depreciable asset.

Decreases to Basis

Certain items that reduce the basis of your property are listed next.

• The section 179 deduction (an elected deduction in place of depreciation deductions).
• The deduction for clean-fuel vehicles and clean-fuel vehicle refueling property.
• Nontaxable corporate distributions.
• Deductions previously allowed or allowable for amortization, depreciation, and depletion.
• Exclusion from income of subsidies for energy conservation measures (see Energy conservation subsidies in chapter 13).
• Credit for qualified electric vehicles.
• Gain from the sale of your old home on which tax was postponed.
• Casualty and theft losses and insurance reimbursements.
• Certain canceled debt excluded from income.
• Rebates received from the manufacturer or seller.
• Easements.
• Gas-guzzler tax.

Casualties and thefts. If you have a casualty or theft loss, decrease the basis of your property by any insurance proceeds or other reimbursement. Also decrease it by any deductible loss. However, increase your basis for your costs after a casualty to restore the damaged property. For information about figuring your casualty or theft loss, see chapter 27.

Easements. The amount you receive for granting an easement is generally considered to be from the sale of an interest in your real property. It reduces the basis of the affected part of the property. If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain.

If the recognized gain is on a capital asset, see chapter 17 for more information about how to report it. If the recognized gain is on property used in a trade or business, get Publication 544, Sales and Other Dispositions of Assets, for more information about how to report this gain.

Depreciation and section 179 deduction. Decrease the basis of your business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you selected.

For more information, get Publication 946.

Credit for qualified electric vehicles. If you claim the credit for qualified electric vehicles, you must reduce the basis of the property on which you claimed the credit. For more information about this credit, see chapter 15 in Publication 535, Business Expenses.

Deduction for clean-fuel vehicle and refueling property. If you take the deduction for either clean-fuel vehicles or clean-fuel vehicle refueling property, or both, decrease the basis of the property by the deduction. For more information about these deductions, see chapter 15 in Publication 535.

Tax-free subsidies for energy conservation measures. A subsidy from a public utility company for the purchase or installation of any energy conservation measure may be tax free. Reduce the basis of the property for which you got the subsidy by the tax-free amount. For more information about this subsidy, see chapter 13.

Example

You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. You added an improvement to the duplex that cost $10,000. In February last year the duplex was damaged by fire. Up to that time you had been allowed depreciation of $23,000. You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. You deducted a casualty loss of $1,000 on your income tax return for last year. You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Figure the adjusted basis of the duplex after the restoration as follows:

Original cost of duplex			$35,000
Addition to duplex			10,000
Total cost of duplex			$45,000
Minus:	Depreciation		23,000
Adjusted basis before casualty			$22,000
Minus:	Deducted casualty loss	$1,000
	Insurance proceeds	19,700
	Salvage proceeds	1,300	22,000
Adjusted basis after casualty			$-0-
Add: Cost of restoring duplex			19,000
Adjusted basis after restoration			$19,000

Your basis in the land is its original cost of $5,000.

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