Figures: tax year 2026
A single asset can carry two different bases at once. Gifted property does exactly that, and the sale price decides which one the taxpayer uses.
Basis is the taxpayer's capital investment in property, the reference amount against which gain, loss and cost recovery are measured. The buyer of an asset acquired for use in a trade or business starts with cost.
Cost basis for purchased business property includes several components:
- Cash paid to the seller at closing.
- The face amount of any note issued to the seller.
- Debt assumed or taken subject to on the acquisition.
- Sales tax, freight, installation, testing and title transfer costs.
- Legal, survey, recording and appraisal fees tied to the acquisition.
KEY: Assumed acquisition debt is part of your cost even though no cash moves. A $400,000 purchase funded with $80,000 cash and a $320,000 assumed mortgage still produces $400,000 of basis.
A cost that acquires the asset, prepares it for its intended use, or produces a betterment, restoration or adaptation is capitalized into basis.
Common mistakes
- Ignoring assumed debt. A $500,000 purchase funded with $150,000 cash and a $350,000 assumed mortgage produces $500,000 of basis, not $150,000.
- Loan fees in the building. The $7,000 origination fee attaches to the loan and is amortized over its term, leaving the real property allocation untouched.
- Depreciating the higher amount. A converted residence with $294,000 building basis and $230,000 conversion value depreciates from $230,000.
Bottom line
- Purchased business basis equals cash paid plus debt assumed plus capitalized acquisition costs, allocated by relative fair market value across land, building and equipment.
- Adjusted basis rises for capital improvements and falls for depreciation allowed or allowable, deducted casualty losses and insurance reimbursements.
- Personal-to-business conversion depreciates from the lower of adjusted basis or conversion fair market value, while gain basis stays at original adjusted basis.
- Gifted property carries over donor basis for gain and uses the lower gift-date value for loss, with proceeds between the two producing no recognized amount.
Exam shortcut
Read the acquisition verb in the first sentence, because it selects the entire rule set. "Purchased" means cost plus assumed debt plus capitalized fees; "gift" means compare donor basis with gift-date value before doing anything; "inherited" means the death-date value and automatic long-term. On a gift stem, mark both bases in the margin before reading the proceeds.
The full lesson (about 5,534 words, 37 min read) adds 7 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.A1
Browse all free CPA REG lessons or jump into free CPA REG practice questions.