Basis Flashcards
Original basis
Cost- amount paid for property in cash / FMV of other property given in the exchange
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?
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
Adjusted basis
original basis +purchase related costs/capital additions, less depreciation
Original Issue Discount (OID)
=Face Value-Issue Price
= 0 if < (.0025redemption price years to maturity)
Carryover basis
Taxpayer receives asset and takes same basis as transferor eg in case of gifts
In general, the basis of appreciated property received as a gift is the
donor’s adjusted basis (i.e., carryover basis)
Effect of gift tax on basis
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))
Cost basis of decedent’s property in community property state
Full FMV of community property
Alternate valuation date (AVD)
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
What assets should an elderly/sick person dispose of first?
Low value and high basis to maximize income tax benefits of step up in basis for assets with a high value and low basis
Cost basis of decedent’s property in common-law state state
one half is adjusted with the step-up, the other half is not adjusted
Original basis
adjusted by deductions (depreciation) or additions (capital improvements)
What realized gains/losses are not recognized for tax purposes?
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)
Amount Realized from sale/disposition of property
Sum of any money received + FMV of all other property received
Adjusted basis
Initial basis
+capital additions
-capital recoveries (depreciation deduction)
When are losses recognized/actually reported in tax return?
If in carrying trade/business, activity for profit, and casualty/theft losses
When are gains/losses not usually recognized?
-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)
Uniform capitalization rule - Tax Reform Act of 1986 (TRA)
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
Designated party
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)
How to determine property’s basis when converting from personal to business
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
Allocation of basis
=Total cost x (FMV of lot/FMV of tract)
Basket purchase
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
Stock rights and basis
- 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.
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?
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).
