Tax Preparer Guide to 1040 Chapter 12 Basis of Property

Question 1

The Cost Basis

Answer 1

The basis of purchased property is generally its cost, determined by the taxpayer’s payment for the property by cash, check, credit or debit card, financing, or other purchase arrangement. Thus, if a taxpayer buys realty for $1 million and finances $800,000, the cost basis of the property is $1 million.

Cost Basis includes: 
Excise taxes 
Freight
Installation and testing costs
Legal and accounting fees (if they must be capitalized, as explained in increases to basis later in this chapter)
Revenue stamps
Sales tax

Question 2

Like-Kind Exchanges

Answer 2

Properties are properties with the same nature or character, even if they have different grade or quality. For example, the exchange of real estate for other real estate is like-kind even if the properties are different. A warehouse exchanged for an apartment building or improved land exchanged for unimproved land exchanged for unimproved land would both qualify as like kind exchanges.

Question 3

Stepped-Up Basis

Answer 3

An heir’s basis in inherited property is called stepped-up basis because the basis increased to the property’s fair market value.

Question 4

Modified Carryover Basis Rules

Answer 4

Opting to apply the modified carryover basis rules simply meant that the heirs could inherit the lesser of the fair market value of the decedent’s property on the date of death or the decedent’s original income tax basis in the property plus the value of certain improvements, but not the full stepped-up basis.