Basis

Question 1

Original basis

Answer 1

Cost- amount paid for property in cash / FMV of other property given in the exchange

Question 2

Ellen paid $12,000 and borrowed $48,000 from the local savings and loan company to purchase for a home she will use as her personal residence. Three years later, she paid $10,000 to add a room onto the house, paid $625 to have the house painted, and $800 for built-in bookshelves.

As of January 1 of the current year, Ellen has reduced her mortgage to $44,300. What is the basis for Ellen’s house?

Answer 2

Most property is acquired by purchase and its initial basis is the cost of the property. Capital additions increase the basis.

The basis on Ellen’s home is computed as follows:

$12,000 (payment) + $48,000 (mortgage) + $10,000 (capital addition [room]) + $800 (capital addition [bookshelves]) = $70,800

Question 3

Adjusted basis

Answer 3

original basis +purchase related costs/capital additions, less depreciation

Question 4

Original Issue Discount (OID)

Answer 4

=Face Value-Issue Price
= 0 if < (.0025redemption price years to maturity)

Question 5

Carryover basis

Answer 5

Taxpayer receives asset and takes same basis as transferor eg in case of gifts

Question 6

In general, the basis of appreciated property received as a gift is the

Answer 6

donor’s adjusted basis (i.e., carryover basis)

Question 7

Effect of gift tax on basis

Answer 7

Donee’s basis may be increased if the FMV>donor’s basis on the date of the gift
= Gift tax paid x ((FMV at time of gift- Donor’d basis)/(FMV at time of gift-annual exclusion))

Question 8

Cost basis of decedent’s property in community property state

Answer 8

Full FMV of community property

Question 9

Alternate valuation date (AVD)

Answer 9

Usually 6 months after date of death: basis in estate is the FMV on that date unless distributed/sold before, in which case FMV on date disposed is used
-May only be used if value of gross estate and amount of estate tax after credits are reduced

Question 10

What assets should an elderly/sick person dispose of first?

Answer 10

Low value and high basis to maximize income tax benefits of step up in basis for assets with a high value and low basis

Question 11

Cost basis of decedent’s property in common-law state state

Answer 11

one half is adjusted with the step-up, the other half is not adjusted

Question 12

Original basis

Answer 12

adjusted by deductions (depreciation) or additions (capital improvements)

Question 13

What realized gains/losses are not recognized for tax purposes?

Answer 13

losses on the sale or exchange of property held for personal use cannot be recognized (most realized gains are recognized, some realized losses are not)

Question 14

Amount Realized from sale/disposition of property

Answer 14

Sum of any money received + FMV of all other property received

Question 15

Adjusted basis

Answer 15

Initial basis
+capital additions
-capital recoveries (depreciation deduction)

Question 16

When are losses recognized/actually reported in tax return?

Answer 16

If in carrying trade/business, activity for profit, and casualty/theft losses

Question 17

When are gains/losses not usually recognized?

Answer 17

-Realized losses on the sale or exchange of assets held for personal use are not recognized for tax purposes.

-Special provisions in tax law (gain/loss may be deferred or loss may be disallowed)

Question 18

Uniform capitalization rule - Tax Reform Act of 1986 (TRA)

Answer 18

Apply principally to inventory, can also affect other property used in trade/business or activity engaged in for profit
- Taxes paid or accrued in connection with the acquisition of property are included as part of the cost of the acquired property
- Taxes paid/accrued in connection with the DISPOSITION of property reduce the amount realized

Question 19

Designated party

Answer 19

Interest paid/incurred during production of following must be capitalized:
-Real property
-Tangible personal property with a class life of 20 years or more/ an estimated production period of more than 2 years/an estimated production period of more than 1 year if the estimated cost of production is more than $1 million.
- Property a taxpayer produces (construct/build/install/manufacture/develop/improve/create/raise/grow)

Question 20

How to determine property’s basis when converting from personal to business

Answer 20

Depreciation based on the lower of FMV or adjusted basis of property at time the asset is transferred from personal use to income-producing use/use in trade/business

If FMV<adjusted basis, then basis for loss on a subsequent sale/disposition is its FMV-depreciation taken before disposition

Question 21

Allocation of basis

Answer 21

=Total cost x (FMV of lot/FMV of tract)

Question 22

Basket purchase

Answer 22

building is a depreciable asset, not land; so need to make sure to allocate apportion. If building needs to be demolished, then future tax deductions may be taken away, ie cost of demolition is applied to land, which can’t be depreciated

Question 23

Stock rights and basis

Answer 23

• sold/exchanged: basis allocated to stock rights
  -exercised: any basis allocated to rights is added to purchase price of acquired stock
  -expire: no loss recognized and any basis allocated is reallocated back to stock

If FMV< 15% of FMV of stock, then basis of stock rights=0, unless taxpayer elects to allocate basis between stock rights and stock owned before distribution of stock rights

If FMV>/=15%, the basis of the stock owned before the distribution must be allocated between the stock and the stock rights.

Question 24

This year, Alice made a gift of property to Bill. The property had a basis to Alice of $45,000 and a fair market value of $75,000 at the time of the gift. The gift was fully taxable so Alice had to pay a gift tax on the transfer of $1,400. Alice made full use of the annual exclusion when paying the gift tax. What is Bill’s basis in the property?

Answer 24

When the FMV is greater than the donor’s basis at the time of the gift; the donee normally takes a carryover basis. When the donor pays a gift tax (only on appreciated property), the portion of the gift tax allocable to the appreciation is added to the basis. $45,000 +[$1,400 X {($75,000 - $45,000) / $60,000}] Note that $60,000 represents the value of the taxable gift. (FMV of $75,000 - $15,000 annual exclusion).

Question 25

Kieran purchases an apartment building for $800,000 to use as a rental property. The land has a $280,000 FMV and the building has a $520,000 FMV.

What is Kieran’s basis for the apartment building?

Answer 25

If more than one asset is acquired in a single purchase transaction the IRS considers this a basket purchase. With a basket purchase, the cost must be apportioned to the various assets acquired. The allocation is based on the relative fair market value (FMV) of the assets.

In Kieran’s case, the purchase is a basket purchase because it involved a building and land. The basis for the apartment building is $520,000.

Question 26

In the current year, Clifford makes one gift of property with a $37,500 basis to Jimmy when the property has a $88,000 FMV. Clifford pays a gift tax of $22,500.

Calculate Jimmy’s basis for the property for determining both gain and loss.

Answer 26

Since the donor, Clifford, paid gift tax on the transfer of property, the donee’s basis increases because the fair market value (FMV) of the property exceeds the donor’s basis on the date of the gift.

The following formula is used to determine the amount to be added on to the donee’s basis:

Gift tax paid ×(FMV at time of gift − Donor’s basisFMV at the time of gift − Annual exclusion)
$22,500 ×($88,000 − $37,500$88,000 − $17,000) =
$22,500 ×($50,500$71,000) =
$22,500 ×0.7113 =$16,003
$16,003 + $37,500 (original basis) = $53,503

Question 27

If a stock that is sold or exchanged is not adequately identified, the _____________ must be used to identify the stock.

Answer 27

the first-in, first-out (FIFO) method must be used to identify the stock.

Question 28

Several years ago, Rhonda bought an original, signed vinyl record of her favorite 80s songwriter, Donald McMichael, for $75. When the musical medium shifted to MP3s, the value of the record dropped to $25 and Rhonda gifted it to her friend, Josie. This year, a vinyl record revival occurred and Josie sold the Donald McMichael album for $65.

Calculate the gain or loss on Josie’s record sale.

Answer 28

The record sale is subject to the ‘double-basis’ rule, and, as a result, there will be no gain or loss to Josie.

Question 29

For an Original Issue Discount (OID) to be zero on a $250,000, 15-year, zero-coupon corporate bond, the purchase price must be greater than _____________.

Answer 29

To find the purchase price at which an OID would be zero, the following formula is used to determine the amount of the maximum discount:

(0.0025 x face value of the bond x bond term)

In this case, the calculation is as follows:

(0.0025 x $250,000 x 15) = $9,375

Therefore, the bond must sell for greater than $240,625 ($250,000 - $9,375) for the OID to be considered zero.

Question 30

If a donee receives a gift with an FMV below the adjusted basis of the donor, and eventually sells the gifted property for an amount that is GREATER than the adjusted basis of the donor, ______________ is used to calculate the gains.

Answer 30

When loss property is gifted and the final sale price is above the original basis of the donor’s adjusted basis, the donee (gift recipient) will use the donor’s adjusted basis to calculate the gains AND will inherit the donor’s holding period.

Question 31

Doris bought rare jewelry fifteen years ago for $126,000. Currently, the jewelry is valued at $256,000 and today she gifted it to her niece, Nicole. Doris paid $20,000 of gift taxes, even after using the $17,000 annual exclusion on the transaction.

Calculate Nicole’s adjusted basis.

Answer 31

To calculate the adjusted basis to the donee, first calculate the gift tax adjustment:

Step 1: Calculate the ‘Appreciation Factor’ [(FMV – Basis) ÷ (FMV – Annual Exclusion)]

[{$256,000 - $126,000) ÷ ($256,000 - $17,000)] = [$130,000 ÷ $239,000] = 0.5439

Step 2: Multiply the ‘Appreciation Factor’ by the Gift Tax Paid

0.5439 x $20,000 = $10,879

Next, add the gift tax adjustment to the original basis to find the adjusted basis.

$10,879 + $126,000 = $136,879