Calculating Basis Flashcards
(14 cards)
What is Basis?
Basis (or cost basis) is the original value of an asset for tax purposes, usually the purchase price, plus certain acquisition costs. It is used to determine capital gain or loss when the asset is sold. The higher the basis, the lower the taxable gain upon sale
What is adjusted basis?
Adjusted basis is the asset’s cost basis after accounting for additions (like capital improvements) and subtractions (like depreciation or casualty losses) during the holding period. It represents the current basis as of today, and is used to calculate gain or loss at sale
How do you calculate basis?
Original purchase price plus acquisition costs.
When you purchase an asset, your initial cost basis includes:
-Purchase price
-Sales tax
-Freight/shipping
-Installation and testing fees
-Commissions and fees
-FMV of any property given in exchange
Example:
You buy equipment for $10,000, pay $800 in sales tax, $200 for shipping, and $500 for installation.
Cost basis = $10,000 + $800 + $200 + $500 = $11,500
How do you Calculate Adjusted Basis?
Cost basis plus capital additions, minus capital recoveries.
Adjusted Basis=Original Cost Basis+Capital Additions−Capital Recoveries
Example:
You buy a home for $150,000, spend $50,000 on renovations, and claim $10,000 in depreciation.
Adjusted basis = $150,000 + $50,000 - $10,000 = $190,000
What are capital additions?
Costs of improvements or betterments that add value or prolong the asset’s life (e.g., adding a new roof to a house)
Whate are capital recoveries?
Amounts recovered through depreciation, amortization, or losses (depreciation deductions, insurance reimbursements)
How is Inherited Property Basis Calculated?
Basis: FMV at date of death (or alternate valuation date if elected by executor)
Holding Period: Always considered long-term, regardless of how long the decedent or beneficiary held the asset.
Example: You inherit stock worth $100,000 at the decedent’s death. The decedent held the stock for 5 months and bought the stock for $80,000. Your basis is $100,000, and your holding period is long-term, even if the decedent’s basis was $80,000.
How is Gifted Property Basis generally calculated?
The donee’s basis is the donor’s adjusted basis at the time of the gift (carryover basis NOT FMV).
The donee’s holding period includes the donor’s holding period and tacks on.
Example: You are gifted stock worth $100,000 by the donor. The donor held the stock for 5 months and bought the stock for $80,000. Your basis is $80,000, and your holding period is 5 months at the time of the gift.
What is the double basis rule for loss property?
If the FMV at the date of the gift is less than the donor’s basis
For gain: Use donor’s basis.
For loss: Use FMV at date of gift.
If the donee then sells for a price between FMV and donor’s basis: No gain or loss recognized
Example:
Donor’s basis: $50,000
FMV at gift: $40,000
Sale price: $45,000
For gain: Basis = $50,000 (no gain, since sale price < basis)
For loss: Basis = $40,000 (no loss, since sale price > FMV)
Result: No gain or loss when sold.
How does gift tax paid affect basis?
If donor pays gift tax, the donee’s basis increases by the portion of gift tax attributable to appreciation.
Step-by-Step Basis Calculation:
Ownership Basis of the Property Before Gift:
The donor’s basis in the property: $150,000.
Gift Tax Paid:
Total gift tax paid: $10,000.
Assume $2,000 of the gift tax is attributable to the appreciation. (This means that part of the gift tax comes from the increase in the property value from $150,000 to $200,000.)
Donee’s Basis:
The donee’s initial basis for the gifted property without considering the gift tax would be the donor’s original basis: $150,000.
However, since the donee’s basis is adjusted for the portion of the gift tax attributable to appreciation, we add that portion to the basis:
Donee’s basis = Donor’s basis + Gift tax attributable to appreciation
Donee’s basis = $150,000 + $2,000 = $152,000.
What is the formula for Donee’s Basis after Gift Tax is Paid?
Sonee’s Basis=Donor’s Basis+(Net Appreciation of Taxable Gift times Gift Tax Paid)
Example
Donor’s adjusted basis: $300,000
FMV at gift: $500,000
Gift tax paid by donor: $80,000
Calculation
Net appreciation: $500,000 (FMV) – $300,000 (donor’s basis) = $200,000.
Taxable gift: $500,000 (assuming no annual exclusion applies).
Basis increase: ($200,000 / $500,000) × $80,000 = $32,000.
Donee’s basis: $300,000 (donor’s basis) + $32,000 = $332,000.
What is the holding period for gifted property?
The holding period tacks on from the donor’s holding period.
What is the loss exception for the holding period for gifted property?
If the donee sells the property at a loss, the holding period for determining whether the loss is long-term or short-term starts on the date the gift is received.
How does basis work regarding Deathbed Gifts?
If appreciated property is gifted to a decedent within one year of death and then inherited by the original donor, the basis remains the decedent’s basis.
