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).
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?
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.
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.
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
If a stock that is sold or exchanged is not adequately identified, the _____________ must be used to identify the stock.
the first-in, first-out (FIFO) method must be used to identify the stock.
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.
The record sale is subject to the ‘double-basis’ rule, and, as a result, there will be no gain or loss to Josie.
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 _____________.
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.
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.
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.
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.
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
