IRS Publication 551 — Basis of Assets

Rehabilitation expenses also increase basis. However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. If you have to recapture any of the credit, increase your basis by the recaptured amount.

If you make additions or improvements to business property, keep separate accounts for them. Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. For more information, see Pub. 946.

The following items increase the basis of property.

• The cost of extending utility service lines to the property.

• Impact fees.

• Legal fees, such as the cost of defending and perfecting title.

• Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements.

• Zoning costs.

• The capitalized value of a redeemable ground rent. Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Don't deduct them as taxes. However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements.

Example. Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. Add the assessment to your property's basis. In this example, the assessment is a depreciable asset. Deducting vs. Capitalizing Costs Don't add to your basis costs you can deduct as current expenses. For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses can't be added to basis. However, you can choose either to deduct or to capitalize certain other costs. If you capitalize these costs, include them in your basis. If you deduct them, don't include them in your basis. See Uniform Capitalization Rules, earlier. The costs you can choose to deduct or to capitalize include the following.

• Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules.

• Research and experimental costs.

• Intangible drilling and development costs for oil, gas, and geothermal wells.

• Exploration costs for new mineral deposits.

• Mining development costs for a new mineral deposit.

• Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical.

• Costs of removing architectural and transportation barriers to people with disabilities and the elderly. If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit.

Decreases to Basis The following are some items that reduce the basis of property.

• Section 179 deduction.

• Deduction under section 179D for certain energy efficient commercial building property.

• Nontaxable corporate distributions.

Table 1. Examples of Increases and Decreases to Basis Increases to basis Decreases to basis Capital improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures