Tax Guide for Farmers – Basis of Assets, Part 4: Basis Other than Cost

In the Internal Revenue Code concerning farmers, there is a section on the basis of assets. The purpose of this series of articles is to provide an overview of the rules concerning the basis of assets. Whereas the previous articles focused on Cost Basis, Allocating Basis, and Adjusted Basis the focus of this article is Basis Other Than Cost.

Basis Other Than Cost

In instances where you cannot use the cost of an asset as the basis, a basis other than cost can be used. Following are explanations of these alternative options for basis.

Property Converted from Personal to Business or Rental Use

When you convert property held for personal use into property used for business or rental purposes, you must determine the basis of the property that you can then depreciate. An example of property converted from personal to business use would include a truck, purchased and used initially for personal use but converted for use in the farming business.

The basis of property classified from personal to business or rental use is the lesser of the fair market value of the property on the date of conversion or the adjusted basis on the date of conversion.

Property Received for Services

If you receive property in exchange for services rendered, you must recognize the property’s fair market value as income. The amount included in income is considered the basis of the property. However, if the price of the services was agreed upon beforehand, this price will be accepted as the fair market value of the property, unless there is evidence that supports a different fair market value.

Taxable Exchanges

A taxable exchange is an exchange of property in which the exchange results in a taxable gain or a deductible loss. Such a gain or loss is also known as a recognized gain or loss. A taxable gain occurs when you receive cash or property that is not similar in use to the property exchanged.

When you receive property in such an exchange, the basis of the property is typically the fair market value of the property.

Nontaxable Exchanges

A nontaxable exchange is an exchange in which the exchange does not results in a taxable gain or a deductible loss. Such a gain or loss is also known as an unrecognized gain or loss.

When you receive property in such an exchange, the basis of the property is usually the same as the basis of the property you exchange.

Involuntary Conversions

If you receive property as the result of an involuntary exchange such as a casualty loss, condemnation, or theft, the basis of the replacement property received is based on the basis of the converted property.

If the replacement property is similar in nature or use to the converted property, the replacement property’s basis is the same as the converted property’s basis as of the date of the conversion with the following adjustments:

  • Decrease the basis by any loss you recognize on the involuntary conversion and any money you receive that you do not spend on similar property
  • Increase the basis by any gain you recognize on the involuntary conversion and any cost of acquiring the replacement property.

If the replacement property is not similar in nature or use to the converted property, or if the replacement is in the form of cash, and you purchase replacement property similar in nature or use to the converted property, the basis of the replacement property is its cost less any gain not recognized on the involuntary conversion.

Like-Kind Exchanges

A like-kind exchange is one where the property transferred and the property received are both held for business or investment purposes. The basis of like-kind property received is the same as the adjusted basis of the property you gave up. Any closing costs you spend should be added to the basis of the like-kind property you receive.

What can you do if you have other questions about adjusted basis?

You can get additional help by contacting a tax attorney. A tax attorney is the only individual who has the training and experience to address tax questions and file tax returns, as well as offering the confidentiality of attorney-client privilege that is the privilege of lawyers.

You can get in touch with a tax attorney by calling the telephone number at the top of this web site or by submitting the form below. So take the first step in getting the help you need today by contacting 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.