	Purpose and Scope

This report provides a simplified explanation of the meaning of "tax basis," the factors that determine a taxpayer's tax basis, and some of the ways in which tax basis is used. The basis rules are found in the Internal Revenue Code (I.R.C.) However, the general rule is that when property is inherited, the recipient's basis in the inherited property is the fair market value of the property on the date of death. However, a number of laws were introduced in the 110 th Congress that would have changed this. However, if the sales price is lower than the donor's adjusted basis, the FMV at the time the gift was received will be the recipient's initial basis in the property for determining the amount of loss from the sale. How Is Basis Adjusted? A taxpayer's basis in property may be increased or decreased after the property is acquired. Personal-use Property

A taxpayer may need to reduce the basis in either business- or personal-use property if that property is damaged (a casualty loss) and the taxpayer receives an insurance settlement or other payment for the damage. Each of the proposals would require buyers to reduce their basis in the residence by the amount of the credit. The Mortgage Forgiveness Debt Relief Act of 2007 ( P.L. However, taxpayers taking advantage of this provision must reduce their basis in their principal residence by the amount of the debt cancellation income that was excluded from income. The Housing Assistance Tax Act of 2008 ( P.L. 110-289 ) provides a refundable tax credit to first-time homebuyers who purchase a principal residence after April 8, 2008, and before July 1, 2009. However, if the property is sold before the credit is fully repaid, the taxpayer generally must repay the remaining amount in the year of the sale. This reduction in basis is used only to determine repayment of the credit. For business-use property, basis is one factor used to determine allowable depreciation.
"Tax basis" is one factor used to determine the income tax consequences when an item is disposed of, whether by sale, abandonment, or contribution. The initial basis is usually cost; however, the basis of a gift is related to its basis in the donor's hands, and the basis of inherited property is generally the property's fair market value on the date of death. The taxpayer's use of the item and subsequent events may require adjusting the original basis, which leads to the term "adjusted basis." Adjustments may either increase or decrease the taxpayer's basis in the property.
On July 30, 2008, Congress passed the Housing Assistance Tax Act of 2008 as part of the Housing and Economic Recovery Act of 2008 ( P.L. 110-289 ). It includes a refundable credit for first-time homebuyers. Unlike other proposals for homebuyer tax credits considered by the 110 th Congress ( H.R. 5565 ; S. 12 , S. 2566 , S. 2734 ), taxpayers generally are not required to reduce their basis in their newly acquired property by the amount of the credit, but are required to pay the credit back. There is a provision for reducing the basis by the credit if the taxpayer sells the property before repaying the credit. In this case, the reduced basis is used to determine whether the taxpayer must repay the remaining credit.
Other recently passed legislation requires reduction in the basis of a taxpayer's principal residence if the taxpayer has cancelled mortgage debt that is excluded from gross income ( P.L. 110-142 ). The Internal Revenue Code (I.R.C.) has a number of provisions that require taxpayers to reduce their basis in property and others that allow them to increase their basis in property.