Business Tax Preparation · Business assets

Basis of assets

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for I. Ohu review

Every gain, every loss and every depreciation deduction runs through basis, and basis is decided by how the property was acquired. Four acquisition routes cover almost everything a business meets, and one of them produces two different bases in the same asset at the same time.

The rule

Purchase. the basis of property is its cost, being the amount paid for it in cash or other property, except as subchapters C, K, O and P otherwise provide^TY2026 (IRC § 1012(a), Reg. § 1.1012-1(a)). Cost includes the incidental costs of acquiring the property and putting it into service, and a purchaser does not include in cost any amount paid to the seller as reimbursement for real property taxes treated by IRC § 164(d) as imposed on the purchaser, but does include taxes it pays or assumes that IRC § 164(d) treats as imposed on the seller^TY2026 (Reg. § 1.1012-1(b)).

And what must be added rather than deducted. no deduction is allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, subject to the exceptions listed in the paragraph^TY2026 (IRC § 263(a)(1)).

Adjustments. proper adjustment shall in all cases be made for expenditures, receipts, losses or other items properly chargeable to capital account, and for depreciation, amortization and depletion to the extent allowed or allowable^TY2026 (IRC § 1016(a)(1), (a)(2)). The second of those is the trap: the reduction is by the amount allowed, but not less than the amount allowable.

Inheritance. the fair market value at the date of the decedent's death, or its value at the alternate valuation date if IRC § 2032 is elected, or its IRC § 2032A special use value if that is elected^TY2026 (IRC § 1014(a)).

Gift. the same as it would be in the donor's hands — but where that basis exceeds the fair market value at the time of the gift, fair market value is used instead for the purpose of determining loss^TY2026 (IRC § 1015(a)).

Current figures

Item	Rule	Authority
Cost basis	the basis of property is its cost, being the amount paid for it in cash or other property, except as subchapters C, K, O and P otherwise provide^TY2026	IRC § 1012(a), Reg. § 1.1012-1(a)
Real property taxes in cost	a purchaser does not include in cost any amount paid to the seller as reimbursement for real property taxes treated by IRC § 164(d) as imposed on the purchaser, but does include taxes it pays or assumes that IRC § 164(d) treats as imposed on the seller^TY2026	Reg. § 1.1012-1(b)
Capital expenditures	no deduction is allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, subject to the exceptions listed in the paragraph^TY2026	IRC § 263(a)(1)
Adjustments to basis	proper adjustment shall in all cases be made for expenditures, receipts, losses or other items properly chargeable to capital account, and for depreciation, amortization and depletion to the extent allowed or allowable^TY2026	IRC § 1016(a)
Inherited property	the fair market value at the date of the decedent's death, or its value at the alternate valuation date if IRC § 2032 is elected, or its IRC § 2032A special use value if that is elected^TY2026	IRC § 1014(a)
Gifted property	the same as it would be in the donor's hands — but where that basis exceeds the fair market value at the time of the gift, fair market value is used instead for the purpose of determining loss^TY2026	IRC § 1015(a)
Property acquired for services	stock issued for services is included in the service provider's gross income under IRC § 83(a) at its fair market value less any amount paid, and that included amount is the shareholder's starting basis in the stock^TY2026	IRC § 83(a)
Property from an involuntary conversion	the basis of replacement property purchased in a transaction that deferred gain is its cost decreased by the gain not recognised, allocated among several properties in proportion to their costs^TY2026	IRC § 1033(b)(2)

How it works in practice

Cost is more than the invoice. the basis of property is its cost, being the amount paid for it in cash or other property, except as subchapters C, K, O and P otherwise provide^TY2026 (IRC § 1012(a)). Sales tax, freight, installation and testing all enter the basis of a machine, because they are costs of acquiring it and putting it into a condition to be used. Legal fees on a purchase of land, title insurance and recording fees enter the basis of the land. The general principle is IRC § 263(a)(1): an expenditure that produces an asset or improves one is added rather than deducted.

Real property taxes split by statute, not by contract. a purchaser does not include in cost any amount paid to the seller as reimbursement for real property taxes treated by IRC § 164(d) as imposed on the purchaser, but does include taxes it pays or assumes that IRC § 164(d) treats as imposed on the seller^TY2026 (Reg. § 1.1012-1(b)). IRC § 164(d) apportions the year’s tax between seller and purchaser by reference to the period each held the property, and the regulation follows: the purchaser’s own share is a deduction, the seller’s share that the purchaser pays is part of cost, and a reimbursement of the purchaser’s own share is neither. What the contract says about who reimburses whom is expressly immaterial.

Basis moves in both directions and the movement is mandatory. proper adjustment shall in all cases be made for expenditures, receipts, losses or other items properly chargeable to capital account, and for depreciation, amortization and depletion to the extent allowed or allowable^TY2026 (IRC § 1016(a)). Improvements and capitalised costs raise it; depreciation, amortisation, depletion, casualty losses and certain credits lower it.

Depreciation reduces basis even if it was never claimed. IRC § 1016(a)(2) reduces basis by the amount “allowed” but “not less than the amount allowable.” So a taxpayer who forgot to claim depreciation on a rental for five years still has the reduced basis when they sell, and the deduction they never took is simply gone. The remedy is a change in method of accounting with a IRC § 481(a) adjustment, not an amended return, and it is the reason a preparer inheriting a client’s fixed asset register checks it before computing a gain.

Inherited property gets a fresh start at death. the fair market value at the date of the decedent's death, or its value at the alternate valuation date if IRC § 2032 is elected, or its IRC § 2032A special use value if that is elected^TY2026 (IRC § 1014(a)). The date-of-death value applies whether it is higher or lower than the decedent’s basis, so an inheritance can step basis down. Two elective alternatives exist — the alternate valuation date under IRC § 2032 and special use value under IRC § 2032A — and both are made on the estate tax return, so the beneficiary’s basis depends on choices made by the executor.

A gift carries two bases and sometimes produces neither gain nor loss. the same as it would be in the donor's hands — but where that basis exceeds the fair market value at the time of the gift, fair market value is used instead for the purpose of determining loss^TY2026 (IRC § 1015(a)). The donor’s basis carries over for computing gain. If that basis exceeds fair market value at the time of the gift, fair market value is used instead for determining loss. The consequence, which the statute does not spell out but which follows directly: where the property is later sold for a price between the two figures, there is no gain under the first rule and no loss under the second, and nothing is reported.

Holding period follows the same logic. IRC § 1223(9) provides that where basis is determined under IRC § 1014 and the property is sold within one year of the death, the person is considered to have held it for more than one year — so inherited property is long-term however briefly it was actually held. The rule sits in IRC § 1223 rather than here, but it is decided by the same acquisition route.

What went into the crane

A construction company buys a crane. The invoice is $75,000, which includes sales tax at the local rate. Delivery costs $500 and assembly costs $400.

Basis is $75,900. the basis of property is its cost, being the amount paid for it in cash or other property, except as subchapters C, K, O and P otherwise provide^TY2026 (IRC § 1012(a)) — the cost is what was paid, and no deduction is allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, subject to the exceptions listed in the paragraph^TY2026 (IRC § 263(a)(1)) confirms that amounts spent to put an asset into service are added rather than deducted. Sales tax on a capital asset is part of its cost, delivery is a cost of acquiring it, and assembly is a cost of making it usable.

The instinct to strip out the sales tax and treat it as a deductible tax is wrong, and the closing sentence of IRC § 164(a) says so directly: a tax paid in connection with an acquisition of property is treated as part of the cost of the acquired property.

Now suppose the company also pays $2,000 for an annual maintenance contract at the same time. That is not a cost of acquiring the crane or putting it into service — it is a service to be received over the following year, deductible when incurred subject to the twelve-month rule of Reg. § 1.263(a)-4(f). Basis stays at $75,900.

The gift that produced nothing

A father gives his daughter shares in his company. His basis is $80,000; their fair market value on the date of the gift is $50,000. Two years later she sells them for $62,000.

the same as it would be in the donor's hands — but where that basis exceeds the fair market value at the time of the gift, fair market value is used instead for the purpose of determining loss^TY2026 (IRC § 1015(a)) gives her two bases. For determining gain, the donor’s $80,000 carries over. For determining loss, because that basis exceeded fair market value at the date of the gift, the $50,000 fair market value applies instead.

Selling at $62,000: there is no gain, because $62,000 is less than $80,000. There is no loss, because $62,000 is more than $50,000. She reports nothing at all.

Sell at $91,000 instead and she has an $11,000 gain, measured against the $80,000. Sell at $44,000 and she has a $6,000 loss, measured against the $50,000. The dual basis only bites in the corridor between the two figures, and inside it the transaction disappears.

Note what the father could have done. Had he sold the shares himself for $50,000 and given her the cash, he would have realised a $30,000 loss. Giving the shares instead destroys it — the loss-limitation limb of IRC § 1015(a) exists precisely to stop a built-in loss being transferred.

The depreciation nobody claimed

A business bought a warehouse for $500,000 in 2016 and has never claimed depreciation on it, because the bookkeeper treated it as land. Allowable depreciation over the period would have been $115,000. The business sells it in 2026 for $700,000.

IRC § 1016(a)(2) reduces basis by the amount allowed, “but not less than the amount allowable.” No depreciation was allowed, so the floor governs: adjusted basis is $500,000 less $115,000, or $385,000.

Gain on the sale is $315,000, not the $200,000 the business expected. It has paid tax on $115,000 of gain corresponding to deductions it never took, and it cannot amend ten years of returns to recover them — the limitation period has closed on all but the most recent.

The route back is a change in method of accounting. Adopting the correct method and filing the form produces a IRC § 481(a) adjustment picking up the whole $115,000 of omitted depreciation in the year of change, without any amended return. The point of the rule is that the taxpayer cannot choose to leave basis high by not claiming — but nor is the deduction irretrievably lost, provided someone notices before the sale.

Traps.

Cost includes the costs of getting the asset ready. {fig:assetbasis.cost} (IRC § 1012(a)). Sales tax, freight and installation are basis, not deductions.

Depreciation reduces basis whether or not it was claimed. IRC § 1016(a)(2) — "allowed ... but not less than the amount allowable."

An inheritance can step basis down. {fig:assetbasis.inherited} (IRC § 1014(a)) applies the date-of-death value whichever direction it moves.

A gift has two bases when it is worth less than the donor paid. {fig:assetbasis.gift} (IRC § 1015(a)) — and between the two figures there is neither gain nor loss.

The dual basis rule applies only where fair market value is below the donor's basis. A gift of appreciated property has one basis, the donor's, for all purposes.

Real property taxes follow IRC § 164(d), not the contract. {fig:assetbasis.real_estate_tax} (Reg. § 1.1012-1(b)) says the terms of sale are immaterial.

How this has changed

The basis provisions are among the oldest and least amended in the Code. IRC § 1012 and IRC § 1015 have stood in substance since 1921, and none of IRC §§ 1012, 1014, 1015 or 1016 was amended by Pub. L. 119-21. The 2026 rules are the 2025 rules.

One 2015 change is still not universally reflected in practice. IRC § 1014(f) caps the beneficiary’s basis at the value finally determined for estate tax purposes, or at the value identified in a statement furnished under IRC § 6035(a). IRC § 6035(a)(1) requires the executor of any estate required to file an estate tax return to furnish that statement both to the Secretary and to each person acquiring an interest in property included in the gross estate. Before those provisions a beneficiary could take a higher basis than the estate had claimed. A business acquiring assets through an estate should have the IRC § 6035 statement, and its absence is a signal that the value has not been fixed.

The interaction with the accelerated cost recovery of the last decade is worth stating. Because bonus depreciation and expensing now write off most business personal property in the year of acquisition, IRC § 1016(a)(2) drives the basis of a great deal of equipment to zero almost immediately. That has consequences elsewhere that follow from this section rather than from anything in those provisions: a casualty loss capped at basis becomes nothing, a like-kind exchange has no basis to carry over, and a sale produces gain equal to the whole price. The provision has not changed; what has changed is how quickly it now operates.

Exam focus

Identify the acquisition route first — purchase, gift, inheritance, exchange, or services — because each has its own section and they do not blend.

For a purchase, add everything spent to acquire the asset and make it usable. For an inheritance, use the date-of-death value and remember it can move basis down. For a gift, ask whether fair market value at the date of the gift was below the donor’s basis, and if it was, apply the dual basis rule.

Know that IRC § 1016(a)(2) reduces basis by the allowable depreciation even where none was claimed, and know that the remedy is a change in method of accounting rather than an amended return.

Finally, expect a question that gives a sale price falling between the two gift bases. The answer is that nothing is reported.

Check yourself

1. A business buys equipment for $40,000 plus $2,400 sales tax, $600 freight and $1,000 installation. What is its basis?

Answer: $44,000. the basis of property is its cost, being the amount paid for it in cash or other property, except as subchapters C, K, O and P otherwise provide^TY2026 (IRC § 1012(a)) makes basis the cost, and all four amounts are costs of acquiring the equipment and putting it into service. The sales tax is not separately deductible: a tax paid in connection with an acquisition is part of the cost of the property.

2. A daughter inherits shares her father bought for $200,000 and which were worth $130,000 on the date of his death. What is her basis?

Answer: $130,000. the fair market value at the date of the decedent's death, or its value at the alternate valuation date if IRC § 2032 is elected, or its IRC § 2032A special use value if that is elected^TY2026 (IRC § 1014(a)) applies the fair market value at the date of death whichever way it moves, so the inheritance steps her basis down by $70,000. The executor could elect the alternate valuation date under IRC § 2032, which would change the figure.

3. A taxpayer receives a gift of land worth $75,000 when the donor’s basis was $110,000, and sells it for $90,000. What does he report?

Answer: Nothing. the same as it would be in the donor's hands — but where that basis exceeds the fair market value at the time of the gift, fair market value is used instead for the purpose of determining loss^TY2026 (IRC § 1015(a)) — $90,000 is below the $110,000 carryover basis so there is no gain, and above the $75,000 fair market value basis used for loss so there is no loss.

4. A landlord has claimed no depreciation on a building for six years. How does that affect his basis on sale?

Answer: It does not help him. IRC § 1016(a)(2) reduces basis by the depreciation allowed, but not less than the amount allowable, so basis falls as though he had claimed it. He should change his method of accounting and take the omitted depreciation as a IRC § 481(a) adjustment before selling.

5. A purchaser of real property pays the seller’s share of the year’s property tax under the contract. How is it treated?

Answer: As part of the cost of the property. a purchaser does not include in cost any amount paid to the seller as reimbursement for real property taxes treated by IRC § 164(d) as imposed on the purchaser, but does include taxes it pays or assumes that IRC § 164(d) treats as imposed on the seller^TY2026 (Reg. § 1.1012-1(b)) — where the purchaser pays or assumes taxes that IRC § 164(d) treats as imposed on the seller, they are part of cost, and what the contract says about the allocation is immaterial.

Change log

2026-08-21Initial draft. Sets out the IRC § 1012 cost rule and what enters cost under Reg. § 1.1012-1, the IRC § 1016(a) adjustments including the rule that depreciation reduces basis by the amount allowed but not less than the amount allowable, the IRC § 1014(a) date-of-death rule with its two elective valuation alternatives, and the IRC § 1015(a) dual basis for a gift that can produce neither gain nor loss.