Original Basis

Putting it Together

In order to correctly calculate the original basis of each asset, a table (like the one below) should be constructed to assist our efforts. The first column is the list of assets associated with our original purchase. You can have many rows of each category. In our example, we are assuming purchased property and we are using a FMV for the land of $12,000 (calculated using our SEV calculation). There is a tractor that was purchased with this parcel that had a FMV at the time of acquisition of $8,000. The timber value on the parcel was determined by determining the volume of timber at acquisition and the appropriate value of the timber. In this example, the total value was $112,154. Finally, we will assume that there is no depreciable real property improvements so we can leave that at a FMV of zero for now.

Our next task is to total the column of FMVs for the assets. In our example, the total of these FMVs is $132,154. Now we can determine that the land represents ( 12,000 ÷ 132,154 ) or 9.08% of the total. We need to enter each of these shares of the total FMV in the column titled “% of Total”. Take a look at the table and see if you can get the same answers.

Now, finally, we use the purchase price of the parcel that we calculated above. Right away you will see that it is very rare, if not unheard of, that the sum of the asset fair market values is exactly equal to the total purchase price. In this example, we will use a purchase price of $125,000, and add to that an additional $1,275 in additional fees for a total of $126,275. We can see that in this purchase the buyer got a “good deal” because the FMV of the parcel was more than the buyer paid.

Now we are ready to determine the original basis of the property. We multiply the Purchase Price by the “% of Total” for each asset and there we have it, the purchase price allocated to each of the assets on the forestland parcel. Make sure that this column adds up exactly to the purchase price. This is the set of values that will represent your original basis and then your adjusted basis in your property. This column represents where the purchase price was actually allocated.