Business Tax Preparation · Business assets

Basis of assets

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for N. O. review

Basis is the number used to measure gain or loss when property is sold. It starts differently depending on how the property was acquired. Buying it, inheriting it, and getting it as a gift each set a different starting basis. That number can also move up or down over time as things happen to the property. This affects anyone who owns property used in a business and later sells, trades, or gives it away. It decides how much taxable gain or loss shows up when that day comes.

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. Verified 2026-08-21IRC § 1012(a) and Reg. § 1.1012-1(a), opened at law.cornell.edu/uscode/text/26/1012 and /cfr/text/26/1.1012-1 (IRC § 1012(a), Reg. § 1.1012-1(a)). Cost includes the incidental costs of acquiring the property and putting it into service, and Verified 2026-08-21Reg. § 1.1012-1(b), opened at law.cornell.edu/cfr/text/26/1.1012-1 (Reg. § 1.1012-1(b)).

And what must be added rather than deducted. Verified 2026-08-21IRC § 263(a)(1), opened at law.cornell.edu/uscode/text/26/263 (IRC § 263(a)(1)).

Adjustments. Verified 2026-08-21IRC § 1016(a)(1) and (a)(2), opened at law.cornell.edu/uscode/text/26/1016 (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. Verified 2026-08-21IRC § 1014(a), opened at law.cornell.edu/uscode/text/26/1014 (IRC § 1014(a)).

Gift. Verified 2026-08-21IRC § 1015(a), opened at law.cornell.edu/uscode/text/26/1015 (IRC § 1015(a)).

Current figures

Item	Rule	Authority
Cost basis	Verified 2026-08-21IRC § 1012(a) and Reg. § 1.1012-1(a), opened at law.cornell.edu/uscode/text/26/1012 and /cfr/text/26/1.1012-1	IRC § 1012(a), Reg. § 1.1012-1(a)
Real property taxes in cost	Verified 2026-08-21Reg. § 1.1012-1(b), opened at law.cornell.edu/cfr/text/26/1.1012-1	Reg. § 1.1012-1(b)
Capital expenditures	Verified 2026-08-21IRC § 263(a)(1), opened at law.cornell.edu/uscode/text/26/263	IRC § 263(a)(1)
Adjustments to basis	Verified 2026-08-21IRC § 1016(a)(1) and (a)(2), opened at law.cornell.edu/uscode/text/26/1016	IRC § 1016(a)
Inherited property	Verified 2026-08-21IRC § 1014(a), opened at law.cornell.edu/uscode/text/26/1014	IRC § 1014(a)
Gifted property	Verified 2026-08-21IRC § 1015(a), opened at law.cornell.edu/uscode/text/26/1015	IRC § 1015(a)
Property acquired for services	Verified 2026-08-21IRC § 83(a), opened at law.cornell.edu/uscode/text/26/83	IRC § 83(a)
Property from an involuntary conversion	Verified 2026-08-21IRC § 1033(b)(2), opened at law.cornell.edu/uscode/text/26/1033	IRC § 1033(b)(2)

How it works in practice

Cost is more than the invoice. Verified 2026-08-21IRC § 1012(a) and Reg. § 1.1012-1(a), opened at law.cornell.edu/uscode/text/26/1012 and /cfr/text/26/1.1012-1 (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. Verified 2026-08-21Reg. § 1.1012-1(b), opened at law.cornell.edu/cfr/text/26/1.1012-1 (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. Verified 2026-08-21IRC § 1016(a)(1) and (a)(2), opened at law.cornell.edu/uscode/text/26/1016 (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. Verified 2026-08-21IRC § 1014(a), opened at law.cornell.edu/uscode/text/26/1014 (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. Verified 2026-08-21IRC § 1015(a), opened at law.cornell.edu/uscode/text/26/1015 (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. Verified 2026-08-21IRC § 1012(a) and Reg. § 1.1012-1(a), opened at law.cornell.edu/uscode/text/26/1012 and /cfr/text/26/1.1012-1 (IRC § 1012(a)) — the cost is what was paid, and Verified 2026-08-21IRC § 263(a)(1), opened at law.cornell.edu/uscode/text/26/263 (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.

Verified 2026-08-21IRC § 1015(a), opened at law.cornell.edu/uscode/text/26/1015 (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.

The gift where only one basis existed

A mother gives her son shares worth $120,000 on the date of the gift; her basis in them was $70,000. Believing the dual basis rule always applies to gifts, he assumes he has a $120,000 basis for gain and a $70,000 basis for loss.

Verified 2026-08-21IRC § 1015(a), opened at law.cornell.edu/uscode/text/26/1015 (IRC § 1015(a)) only produces two bases where fair market value at the date of the gift is below the donor’s basis. Here fair market value exceeds basis, so the dual-basis mechanism never engages — his basis is $70,000, the donor’s carryover basisWhen property is given as a gift, the person who receives it generally keeps the giver's original basis, rather than starting fresh at the property's value on the day of the gift. figure, for every purpose, gain and loss alike. If he later sells for $95,000 his gain is $25,000, not zero; the assumption that every gift carries two bases fails on appreciated property.

Long-term after three weeks

A beneficiary inherits stock — a step-up in basisWhen someone inherits property, their basis in it usually becomes the property's value on the date of death, rather than what the original owner paid — often erasing gain that built up during the owner's lifetime. acquisition — and sells it nineteen days after the decedent’s death, at a price above the date-of-death value.

IRC § 1223(9) treats property whose basis is determined under § 1014 as held for more than one year, regardless of how briefly the beneficiary actually held it. Sold on day nineteen or day three hundred, the gain is long-term either way — the same nineteen-day holding periodHow long a taxpayer owned an asset before selling it. It determines whether gain or loss on the sale is treated as long-term or short-term. would produce short-term gain for almost any other kind of acquisition, and produces long-term gain here solely because of how the property was acquired.

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. Verified 2026-08-21IRC § 1012(a) and Reg. § 1.1012-1(a), opened at law.cornell.edu/uscode/text/26/1012 and /cfr/text/26/1.1012-1 (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. Verified 2026-08-21IRC § 1014(a), opened at law.cornell.edu/uscode/text/26/1014 (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. Verified 2026-08-21IRC § 1015(a), opened at law.cornell.edu/uscode/text/26/1015 (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. Verified 2026-08-21Reg. § 1.1012-1(b), opened at law.cornell.edu/cfr/text/26/1.1012-1 (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.
2026-08-25Added a plain-language summary, glossary marks, and two typed scenarios (fails, timing) alongside the existing three.