Basis of Property: Basic Rules for Gain and Loss
Published November 7, 2026
Publication 551 (Rev. December 2025), Basis of Assets, explains how to figure the basis of property. Basis is the amount of your investment in property for tax purposes. You use it to figure gain or loss when you sell or dispose of property. You also use it for depreciation, amortization, depletion, and casualty losses. The publication says you must keep accurate records of all items that affect basis, so you can make these computations. This guide is general information. It is not advice about your return.
Cost basis
The publication says the basis of property you buy is usually its cost. Cost is the amount you pay in cash, debt, other property, or services. Your cost can also include sales tax, freight, and installation. It can include other costs that must be capitalized, such as some legal and accounting costs. Keep these records with your purchase papers.
For stocks and bonds, the basis is generally the purchase amount plus costs of buying, such as commissions. If you buy property with little or no interest, the basis is generally the stated purchase amount minus the unstated interest.
Adjusted basis
Before you figure gain or loss, you usually adjust the basis. The result is the adjusted basis. Improvements that have a useful life of more than 1 year increase basis. The publication gives examples, such as putting an addition on your home, replacing an entire roof, or installing central air conditioning.
Some items decrease basis. The publication lists depreciation and amortization you deducted, casualty losses you deducted, and the section 179 deduction. It also lists nontaxable corporate distributions, certain vehicle credits, and certain energy subsidies. Repairs are different from improvements. See home improvements vs. repairs for the home rules.
As a general note, a lower basis usually means a larger gain when you sell. Property used in a business or as a rental can also be depreciated, and each depreciation deduction lowers basis. Keep the depreciation schedules with the property records.
Property you receive as a gift
To figure the basis of a gift, you need three amounts. They are the donor's adjusted basis just before the gift, the fair market value (FMV) at the time of the gift, and any gift tax paid. If the FMV is less than the donor's adjusted basis, your basis depends on whether you sell at a gain or a loss.
For a gain, your basis is the donor's adjusted basis. For a loss, your basis is the FMV at the time of the gift. Both figures are adjusted for any required changes while you held the property. The two bases can differ, so keep the donor's records.
Inherited property
The publication says the basis of inherited property is generally one of these. It is the FMV at the date of the person's death. It can be the value on the alternate valuation date, if the personal representative chooses that date. It can also be the special-use value for certain farm or business real estate, if that method was chosen for estate tax purposes. Some heirs receive a Schedule A (Form 8971) from the executor that shows the estate tax value. See inherited property basis and the date of death.
Simple steps
- Keep records of the purchase amount and every cost added to basis.
- Keep records of improvements, depreciation, and casualty losses.
- For a gift, ask the donor for the adjusted basis and the FMV on the gift date.
- For inherited property, keep the date-of-death value or the Schedule A (Form 8971).
For related topics, see gifted property cost basis and casualty and theft losses.
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Sources: Sources: IRS, Publication 551 (Rev. 12-2025), Basis of Assets (https://www.irs.gov/pub/irs-pdf/p551.pdf) This is general information, not advice about your specific return.
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