REG property-tax coverage for original basis, adjusted basis, gifts, inheritances, conversions, and special basis rules.
This chapter covers the basis rules that determine gain, loss, depreciation, and carryover consequences throughout REG. Many later tax questions become manageable once asset basis is computed correctly at acquisition and adjusted consistently over time.
Basis questions should be solved chronologically. Identify the acquisition event, determine the starting basis rule, adjust for later events, and only then compute depreciation, gain, loss, or transfer consequences.
| Basis issue | What to decide first | Common REG trap |
|---|---|---|
| Original basis | Whether cost, assumed liabilities, acquisition costs, or other amounts enter starting basis. | Using purchase price alone when other basis elements apply. |
| Gift or inheritance | Whether carryover, fair market value, or stepped basis rules control. | Using the same basis rule for gifts and inheritances. |
| Conversion to business use | Which basis is used for depreciation versus loss. | Ignoring fair market value at conversion. |
| Wash sale or related party | Whether a special adjustment or disallowance changes basis. | Calculating loss correctly but missing the basis carryover effect. |
| Step | What to identify | Why it matters |
|---|---|---|
| Identify acquisition event | Purchase, contribution, gift, inheritance, conversion, wash sale, or related-party transfer. | Basis starts with the event type. |
| Set initial basis | Cost, carryover basis, stepped basis, fair market value, or special rule amount. | The starting amount drives every later tax calculation. |
| Adjust for later events | Improvements, depreciation, amortization, casualty, return of capital, or disallowed loss. | Adjusted basis is rarely just original cost. |
| Separate tax purposes | Gain, loss, depreciation, credit, or limitation computation. | Some rules use different basis for different purposes. |
| Preserve carryover consequences | Holding period, deferred loss, replacement basis, or related-party adjustment. | Basis rules often move tax effects into later years. |
| Checkpoint | Ask before calculating | Exam effect |
|---|---|---|
| Starting rule | Did the taxpayer acquire the asset by purchase, gift, inheritance, conversion, contribution, or replacement? | The acquisition event decides whether cost, carryover basis, fair market value, or a special rule applies. |
| Separate gain and loss basis | Does the rule create one basis for gain and a different basis for loss? | Gift and conversion questions often test the gap between basis measures. |
| Capital additions | Have improvements, assessments, or acquisition costs increased basis? | REG distractors often omit costs that should be capitalized rather than deducted. |
| Basis reductions | Have depreciation, amortization, casualty losses, credits, or return of capital reduced basis? | Adjusted basis drives both gain or loss and later recovery deductions. |
| Deferred consequences | Was loss disallowed, gain deferred, or basis transferred into replacement property? | Basis tracking often explains why a later-year answer differs from the current-year cash result. |