Basis in the World of Tax: Property, Part 3

Tax Law and News tax accountant

Thanks for tuning back into my series on basis. This piece is the third and final one on basis of property.

Basis of Property for Which a Deduction has Been Taken

The basis of medical equipment, such as a hospital bed or wheelchair, for which a deduction has been taken on Schedule A is reduced by the amount of that deduction, except for any amount that was not deductible due to the 10 percent of adjusted gross income limitation. If adjusted gross income is too high to allow a medical deduction, then there is no reduction in basis.

For example, assume that the adjusted gross income is $100,000, so the 10 percent limitation is $10,000. The total medical expense is $15,000, of which the wheelchair represents $2,500

First, we need to determine the percentage of the wheelchair to the total medical expenses:

  • 2,500/15,000 = 16.67 percent.
  • We then multiply that percentage by the disallowed amount of $10,000, which results in a basis of $1,667 for the $2,500 wheelchair.
  • If the adjusted gross income had been more than $150,000, then the basis of the wheelchair would not have been reduced.

Basis of Property for Which a Tax Credit has Been Taken

The basis of property for which a tax credit has been taken is reduced by the amount of the credit. In this case, you may have a different basis for federal and state if the state does not allow the same credit or perhaps has a different credit. Energy tax credits will generally create a different basis for state returns.

Basis of Real Property

First, request the purchase contract. If the loan has low or no interest stated, the basis of the property is the purchase price minus the unstated interest. If the interest rate is less than the applicable federal rate, it is considered a low or no interest loan. Please refer to IRS Pub 537, Installment Sales, for more information.

For example, the purchase price is $100,000 with zero interest stated. Assuming the federal rate is 4 percent, the recalculated purchase price is $96,153.85. How do we arrive at that number? 100,000 equals 104 percent, so you divide 100,000 by 104 percent.

When it comes to the settlement statement, not everything adds to basis. All expenditures incurred to get the asset ready for its use up to and including the day it is placed in service add to basis.

Seller-paid points reduce the buyer’s basis if the home was bought after 1990 but before April 4, 1994, and the points were deducted as mortgage interest in the year paid. If the home was bought after April 3, 1994, points reduce basis even if no mortgage interest deduction was taken.

Delinquent property taxes paid by the buyer add to the cost basis of the property.

An allocation between land and building must be made in a reasonable manner. Regulations state that if the fair market value of the land and the building is not determinable, then the taxpayer may allocate the basis of the assets based on the assessed values for real estate tax purposes. This is the IRS safe harbor method.

The property tax statement can be used to establish basis. It usually lists real market value and assessed value, as well as a breakdown between building and land. If the statement is not available, you can call the county tax assessor’s office since this is public information. The county recorder or the tax assessor’s website might show the sales history with which you can determine what the taxpayer originally paid for the property. This is a good starting point. In addition, title companies, or attorney’s offices in some states, keep records of property sales.

Personal property purchased with real property may be allocated in a reasonable manner; however, a cost segregation study is recommended to back up the basis for shorter depreciation life under IRC Section 1245.

Examples of Section 1245 property include:

  • Cabinetry
  • Carpet
  • Draperies and blinds
  • Furniture and appliances
  • Shelving
  • Signage
  • Window air-conditioning units

Please note, the cost of demolition of a building adds to the basis of the land where the building was located.

The next article in my series on basis will be the last. Stay tuned!

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