10 Basis of Assets

Question 1

Basis of Assets

Answer 1

Question 2

What is the best definition of real property for tax purposes?

Answer 2

Answer: Real property is land and everything permanently attached to it

Real property includes land, buildings, and anything permanently affixed to the land (e.g., houses, trees, minerals in the ground).

It does not include all tangible property — for example, cars and lumber are tangible but not real property.

Intangible rights (like mineral rights or contracts) are classified as personal property, even if they involve real estate.

Minerals in the ground are real property, but once removed (e.g., mined), they become personal property.

Key Rule:

Real property = land + anything permanently attached to it.
Personal property = everything else (movable or not permanently fixed).

Question 3

Inherited Property - Basis Rules

Answer 3

1) Basis = FMV on date of death (or alternate valuation date, if elected).
2) Decedent’s original cost is ignored.
3) Estate taxes paid are not included in basis.
4) Always treated as long-term property.
5) Heir receives a step-up (if FMV > original cost) or step-down (if FMV < original cost) basis — ensures gain/loss starts from FMV at inheritance.

Question 4

Inherited Property - Alternate Valuation Date (AVD) Rules

Answer 4

1) Normal basis = FMV on date of death.
2) If AVD is elected, basis = FMV on the earlier of:
- 6 months after death, OR
- Date property is transferred to heir.
3) If no transfer date is given, assume transfer was after 6 months → use 6-month FMV.
4) AVD can only be used if it reduces both estate value and tax owed.
5) Inherited property is always treated as long-term.

Question 5

Gifted Property - Basis & Holding Period Rules

Answer 5

1) If FMV at gift date ≥ donor’s basis → use donor’s basis and holding period carries over.
2) If FMV at gift date < donor’s basis → use dual basis:
- For gains: use donor’s basis
- For losses: use FMV at gift date
- For sales between the two: no gain/loss
3) Holding period for gains = donor’s original holding period
4) Holding period for losses = begins day after gift
5) Donor-paid gift tax can increase basis (if applicable, not in this case)

Question 6

What costs are included in the depreciable basis of real property for tax purposes

Answer 6

1) Only the cost of depreciable real property (like buildings) is included in the depreciable basis.
2) Land is not depreciable — it has an indefinite life.
3) Operating costs (e.g., property taxes) are expensed as incurred, not capitalized.
4) Depreciable basis = construction cost of building only.
5) Do not include land cost or real estate taxes in depreciable basis.

Question 7

Which cost cannot be amortized as an organizational expense for tax purposes?

Answer 7

1) Stock issuance costs cannot be amortized or deducted; they reduce APIC.
2) Organizational costs like incorporation fees, legal setup, director fees, and meeting costs can be amortized.
3) Up to $5,000 can be deducted immediately; the rest is amortized over 180 months.
4) If total costs exceed $50,000, the immediate deduction is reduced dollar for dollar.
5) Stock issuance costs are excluded because they don’t relate to starting operations.

Question 8

What is tangible personal property?

Answer 8

1) Has physical substance and is movable.
2) Examples: oil painting, car, furniture.
3) Intangibles (e.g., stocks, trademarks, notes) do not qualify.
4) Ownership documents don’t make an item tangible.