Page 136 - Virtual Currencies

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
for buying property is a cost that must be paid the amount you pay for the property plus the Activities subject to the rules. You must use
even if you bought the property for cash. amount to be paid on the mortgage. the uniform capitalization rules if you do any of
The following items are some of the settle- the following in your trade or business or activity
ment fees or closing costs you can include in Example. If you buy a building for $20,000 carried on for profit. However, see Exceptions
the basis of your property. cash and assume a mortgage of $80,000 on it, below.
• Abstract fees (abstract of title fees). your basis is $100,000. • Produce real or tangible personal property
• Charges for installing utility services. for use in the business or activity.
• Legal fees (including title search and prep- Constructing assets. If you build property or • Produce real or tangible personal property
aration of the sales contract and deed). have assets built for you, your expenses for this for sale to customers.
• Recording fees. construction are part of your basis. Some of • Acquire property for resale.
• Surveys. these expenses include the following costs. You produce property if you construct, build,
• Transfer taxes. • Land. install, manufacture, develop, improve, create,
• Owner's title insurance. • Labor and materials. raise, or grow the property. Treat property pro-
• Any amounts the seller owes that you • Architect's fees. duced for you under a contract as produced by
agree to pay, such as back taxes or inter- • Building permit charges. you up to the amount you pay or costs you oth-
est, recording or mortgage fees, charges • Payments to contractors. erwise incur for the property. Tangible personal
for improvements or repairs, and sales • Payments for rental equipment. property includes films, sound recordings, video
commissions. • Inspection fees. tapes, books, or similar property.
Settlement costs don't include amounts In addition, if you own a business and use your Under the uniform capitalization rules, you
placed in escrow for the future payment of items employees, material, and equipment to build an must capitalize all direct costs and an allocable
such as taxes and insurance. asset, don't deduct the following expenses. You part of most indirect costs you incur due to your
The following items are some settlement must include them in the asset's basis. production or resale activities. To capitalize
fees and closing costs you can't include in the • Employee wages paid for the construction means to include certain expenses in the basis
basis of the property. work, reduced by any employment credits of property you produce or in your inventory
allowed.
1. Casualty insurance premiums. • Depreciation on equipment you own while costs rather than deduct them as a current ex-
pense. You recover these costs through deduc-
2. Rent for occupancy of the property before it's used in the construction. tions for depreciation, amortization, or cost of
closing. • Operating and maintenance costs for goods sold when you use, sell, or otherwise dis-
equipment used in the construction.
3. Charges for utilities or other services rela- • The cost of business supplies and materi- pose of the property.
Any cost you can't use to figure your taxable
ted to occupancy of the property before als used in the construction. income for any tax year isn't subject to the uni-
closing. Don't include the value of your own la- form capitalization rules.
4. Charges connected with getting a loan. bor, or any other labor you didn't pay
!
The following are examples of these CAUTION for, in the basis of any property you Example. If you incur a business meal ex-
charges. construct. pense for which your deduction would be limi-
a. Points (discount points, loan origina- ted to 50% of the cost of the meal, that amount
is subject to the uniform capitalization rules.
tion fees). Business Assets The nondeductible part of the cost isn't subject
b. Mortgage insurance premiums. to the uniform capitalization rules.
c. Loan assumption fees. Terms you may need to know More information. For more information about
d. Cost of a credit report. (see Glossary): these rules, see the regulations under section
e. Fees for an appraisal required by a Amortization 263A of the Internal Revenue Code and Pub.
538, Accounting Periods and Methods.
lender. Capitalization
5. Fees for refinancing a mortgage. Depletion Exceptions. For tax years beginning in 2022,
Depreciation
you're not subject to the uniform capitalization
If these costs relate to business property, items Fair market value (FMV) rules if your average annual gross receipts are
(1) through (3) are deductible as business ex- Going concern value $27 million or less for the 3 preceding tax years
penses. Items (4) and (5) must be capitalized Goodwill and you're not a tax shelter. See section
as costs of getting a loan and can be deducted Intangible property 263A(i).
over the period of the loan. Modified Accelerated Cost Recovery In addition, the following are not subject to
System (MACRS) property
Points. If you pay points to obtain a loan (in- Personal property the uniform capitalization rules.
• Property you produce that you don't use in
cluding a mortgage, second mortgage, line of Recapture your trade, business, or activity conducted
credit, or a home equity loan), don't add the Section 179 deduction for profit.
points to the basis of the related property. Gen- Section 197 intangibles • Qualified creative expenses you pay or in-
erally, you deduct the points over the term of Tangible property cur as a freelance (self-employed) writer,
the loan. For more information on how to deduct photographer, or artist that are otherwise
points, see Points in chapter 4 of Pub. 535. deductible on your tax return.
Points on home mortgage. Special rules If you purchase property to use in your busi- • Property you produce under a long-term
may apply to points you and the seller pay ness, your basis is usually its actual cost to you. contract, except for certain home construc-
when you obtain a mortgage to purchase your If you construct, create, or otherwise produce tion contracts.
main home. If certain requirements are met, you property, you must capitalize the costs as your • Research and experimental expenses de-
can deduct the points in full for the year in which basis. In certain circumstances, you may be ductible under section 174 of the Internal
they're paid. Reduce the basis of your home by subject to the uniform capitalization rules (dis- Revenue Code.
any seller-paid points. For more information, cussed next). • Before 2018, costs for personal property
see Points in Pub. 936, Home Mortgage Inter- acquired for resale if your (or your prede-
est Deduction. Uniform Capitalization Rules cessor's) average annual gross receipts for
the 3 previous tax years don't exceed $10
Assumption of mortgage. If you buy property million.
and assume (or buy subject to) an existing The uniform capitalization rules specify the
mortgage on the property, your basis includes costs you add to basis in certain circumstances.

Publication 551 (December 2022) Page 3