Figuring the Basis of Properety In Order to Generate a Correct Tax Return

If you ask 10 different Tax professionals to calculate the basis of a select group of properties, you will more then likely get 4 to 5 different answers.

Professional tax software helps tax professionals to come up with the best and most correct answer, because the software asks the professional certain questions and the advance software development helps to calculate the basis as close to the tax code as possible.

However, when there is no professional software, you have to refer to Publication 17 for the tax year in question.

That is what we have done here (2007)

We will divide the information into three parts as the Publication 17 for 2007 has done, but will only address the first section in this posting.

* cost basis
* adjusted basis
* basis other than cost


Your basis is the amount of your investment in property for tax purposes. You use the basis to figure gain or loss on the sale, exchange or disposition of property. You also use the basis to figure deductions for depreciation, amortisation, depletion and casualty losses.

So being able to figure the basis is extremely important in arriving at the correct deductions in a tax return. (It is believed that many tax payers miss the boat entirely when preparing their own tax return, when it comes to figuring the basis and using that information to calculate a legal tax deduction)

Property used for business or investment purposes and for personal purposes must allocate the basis based on the use. ONLY the basis allocated to the business or investment use of property can be depreciated.

The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property or SERVICES.

Your cost also includes amount you pay for the following items:

* sales tax
* freight
* installation and testing
* excise taxes
* legal and account fees
* revenue stamps
* recording fees and
* real estate taxes (if you assume liability for the seller)

(The basis of real estate and business assets may include other items)

Real Property - also called real estate, is land and generally anything built on, growing on, or attached to land.

When you buy real estate, certain fees and other expenses you pay, are part of your cost basis in the property.

Example: If you pay a lump sum for the building and the property, you allocate the cost basis according to the respective fair market values FMV at the time of the purchase. Then figure the basis of each asset by multiplying the lump sum by a fraction. The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase.

The FMV or fair market value is the price at which the property would change hands between a willing buyer and a willing seller or sales of similar property on or about the same date may be helpful in figuring the FMV.

Your bases includes the settlement fees and closing cost you paid for buying the property. Please note: A fee for buying property is a cost that must be paid even if you buy the property for cash. You CANNOT include fees and costs for getting a loan on the property in your basis.

When you buy property and assume or buy the property subject to an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage.

The following are some of the settlement fees or closing cost that you can include in the basis of your property. (Not to be confused with what you can deduct)

* abstract fees abstract of title fees
* charges for installing utility services
* legal fees including fees for the title search and preparation of the sales contract and deed
* recording fees
* survey fees
* transfer taxes
* owner's title insurance
* any amounts the seller owes that you agree to pay, such as interests, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

If you pay real estate taxes, the seller owed on the property you purchased, and the seller did not reimburse you, you can treat those real estate taxes as a part of you basis. You CANNOT deduct them as an expense.

Points - If you pay points to get a loan, including a mortgage, second mortgage, line of credit or a home equity loan, do NOT add the points to the basis of the property. Generally you can deduct the points over the term of the loan.

If certain requirements are met, you can deduct points in full for the year in which they are paid.

Then there is the topic of Adjusted Basis, more on this at a latter time.

Help with Past due Returns: http://taxeswilltravel.com/