A more thorough explanation:

Definition: Substituted basis refers to the value assigned to a taxpayer's investment in property, which is primarily used for computing gain or loss from a transfer of the property. It is the basis of property transferred in a tax-free exchange or other specified transaction.

Examples:

• Carryover basis: The basis of property transferred by gift or in trust, equaling the transferor's basis.
• Stepped-up basis: The basis of property transferred by inheritance, which equals the fair market value of property on the date of the decedent's death (or on the alternate valuation date).
• Adjusted basis: Basis increased by capital improvements and decreased by depreciation deductions.
• Adjusted cost basis: Basis resulting from the original cost of an item plus capital additions minus depreciation deductions.

These examples illustrate how the substituted basis is used to determine the value of property transferred in different types of transactions. For instance, in a tax-free exchange, the substituted basis is used to calculate the gain or loss from the transfer of property. In the case of carryover basis, the basis of the property transferred is equal to the transferor's basis, while in stepped-up basis, the basis is equal to the fair market value of the property on the date of the decedent's death.