Tax Guide for Farmers – Basis of Assets, Part 1: Cost Basis

The Internal Revenue Code contains the laws used to determine how income and expenses are reported when filing federal income taxes. The Code and supporting court decisions are comprehensive in covering tax situations for individuals and businesses, including how to complete your taxes if you own a farm or run a farming business.

The Code publications on farming include sections on the basis of assets, which is the focus of this article.

Basis of Assets

Basis refers to the amount of money you have invested in an asset for income tax purposes. Basis is used to determine if you have a gain or a loss when you sell, exchange, or otherwise dispose of the asset. Basis is also used when calculating amortization, depletion, depreciation, and loss from a casualty event.

When an asset is used for both business and personal purposes, you must calculate the percent of business and personal use to allocate basis. Only the amount of basis associated with portion for business use can be used in calculating depreciation.

The basis of an asset can change, being adjusted either up or down, based on events that affect the asset. When you make improvements to the asset, the cost of the improvements will increase the basis of the asset. When you take deductions related to the asset for depreciation, casualty events, and certain other activities, the amount will decrease the basis of the asset.

Cost Basis

The basis of an asset typically begins with the cost of the asset. Cost is the amount you pay for the asset. This includes payment in any form, including cash, debt liabilities, or exchanging other property or services of value. The cost used in determining the basis of an asset include sales tax, freight, installation, and testing. Basis can also include certain other direct and indirect costs associated with buying or otherwise creating an asset. The basis of an asset usually does not include interest paid on debit obligations.

Low or No Interest Loans

If you purchase an asset using a payment plan that charges low or no interest, the basis of the asset is the purchase price minus the amount of unstated interest. The amount of unstated interest is the interest that should have been charged on the loan if current federal interest rates were used.

Basis of Real Property

Real property or real estate refers to land and anything built on, growing on, or otherwise attached to the land. When you buy real property, certain costs beyond the purchase price are used in determining the basis of the land.

Lump Sum Purchase of Real Property

If you buy land and the structures on the land as a single purchase, you must allocate the purchase price between the land and the structures to determine the basis of each. The allocation must be made based on the fair market value of the land and the improvements on the land at the time of the purchase.

Fair market value refers to the price at which an asset would be sold when exchanged between a willing buyer and a willing seller, neither of whom have unusual incentive to pursue the transaction and both having a reasonable knowledge of the facts related to the asset. You may be able to use the sales price of similar assets to help determine the fair market value of your asset.

Taxes on Real Property

If the purchaser of real property pays the taxes owed on the real property by the seller and the purchaser does not receive reimbursements from the seller for the taxes, the amount of the taxes is added to the basis of the property.

If the purchaser reimburses the seller for taxes the seller paid, the purchaser can deduct the amount of the taxes as an expense. Whether or not the purchaser reimburses the seller for taxes paid, do not include the amount of the taxes in the basis of the property.

What can you do if you have other questions about the basis of assets?

If you have additional questions about taxes related to farming or calculating the basis of your assets, you can get answers from a tax attorney. A tax attorney specializes in understanding the laws in the Internal Revenue Code. A tax attorney, through education and experience, can answer your questions and help reduce the amount of tax you pay.

You can contact a tax attorney by calling the phone number at the top of this web site or completing the form below. Your initial consultation with a tax attorney is free of charge. Any conversation you have with a tax attorney is also completely confidential.

Get the help you need with your income taxes today by getting in touch with a tax attorney.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.