Question

Jax wants to sell some property but needs to determine the basis first. Which of the following items increase(s) his original basis?
Discounts, rebates, or reimbursements of the purchase price.
Insurance reimbursements for property damage.
Tax credits received through ownership of the asset.
The cost of capital improvements.

Answer 1

Only the cost of capital improvements increases his original basis.

Brief explanations:
- Discounts, rebates, or reimbursements of the purchase price reduce the amount paid and therefore reduce the basis (not increase it).
- Insurance reimbursements for casualty/damage generally do not increase basis; they either reduce basis or are treated under involuntary conversion rules (replacement rules may affect the new basis).
- Tax credits reduce tax liability and, for certain business credits, must be used to reduce the asset’s basis — they do not increase it.
- Costs of capital improvements (amounts spent to add value, prolong useful life, or adapt the property to new use) are added to basis.