Property Transactions: Basis & Cost Recovery

Basis

• Purchase: cost + liabilities assumed + acquisition costs.
• Gift: donor's basis; if fair market value (FMV) < donor's basis → dual basis (gain: donor's basis; loss: FMV; in between: no gain or loss).
• Inherited: FMV at death (or 6 months later); always long-term.
• Personal to business use: lesser of basis or FMV.

Modified Accelerated Cost Recovery System (MACRS)

• 5-year: cars, computers. 7-year: furniture, equipment. 15-year: land improvements, qualified improvement property.
• Residential rental: 27.5 years. Nonresidential: 39 years. Straight-line, mid-month.
• Half-year convention; mid-quarter if > 40% placed in service in the fourth quarter.
• No salvage value.

Expensing (One Big Beautiful Bill Act (OBBBA))

• Section 179: $2.5 million, phase-out above $4 million (2025, indexed); limited to business income — no loss.
• Bonus: 100%, permanent, property acquired after January 19, 2025; no cap; can create a loss.
• Order: 179 → bonus → MACRS.
• Domestic research costs: expensed again (tax years after 2024).

Amortization

Section 197 intangibles: 15 years. Start-up costs: $5,000 immediate (phase-out over $50,000), rest over 180 months.

Exam traps

• Land is never depreciated; land improvements are (15-year property).
• Listed property such as cars used 50% or less for business: no Section 179 or bonus — straight-line under the alternative system.
• The mid-quarter 40% test ignores residential and nonresidential real property and amounts expensed under Section 179.
• A gift on which gift tax was paid: add the tax attributable to the appreciation to the donee's basis.