R2- M1- Basis and Holding Period of Assets Flashcards
1 Adjusted Basis and Holding Period of Assets Sold: Purchase 2 Adjusted Basis and Holding Period of Assets Sold: Gifts 3 Adjusted Basis and Holding Period of Inherited Assets 4 Property Converted from Personal to Business Use: Part 1 5 Property Converted from Personal to Business Use: Part 2 6 Intangible Property: Part 1 7 Intangible Property: Part 2 (10 cards)
Basis for Gain or Loss: GIFTED ASSETS
For purpose of calculating depreciation on the asset (if applicable ) prior to the sale, the depreciable basis is the FMV (that is lower than the Rollover basis)
The donor’s holding period also rolls over to the DONEE!
Donor’s Rollover = Original Purchase price to the Donor
+ Gift tax paid due to appreciation of the value
= Rollover Basis to the Donee
If Donee sells and the FMV at the time of donation is lower than rollover basis then
Gain= Selling Price - Rollover Basis to the Donee or SP- FMV , both of these should show as GAIN, if its both gain or loss, then no gain or loss should be recognized.
Loss= Selling Price- Rollover Basis to the Donee- this is not the loss, there is another test if FMV at the time of donation is lesser than Rollover basis
Loss= SP- FMV, if this test becomes a gain,
Then no loss or gain should be recognized by the Donee
The basis to the Donee is the “MIDDLE SELLING PRICE”
Gifted property generally retains the cost basis it had in the hands of the donor at the time of the gift.
An exception applies, however, if theFMV at the date of the gift is < than the cost basis.
In such situations, the donee’s basis depends on the donee’s futureSP .
- If the SP > Donor’s basis, the donee’s basis equals the donor’s cost basis.
- If the SP < Donor’s basis, but > FMV at the time of gift, the donor’s basis = SP so there is no Gain or Loss recognized
- If the SP < both Donor’s basis and FMV the donee’s basis equals FMV, lesser loss using lower FMV
What is Alternate Valuation Date?
Purpose is to Hedge the value of the properties.
All assets fall under alternate valuation date
In other words, the executor can’t cherry-pick stocks to be valued six months after the date of death and retain the original valuation date for other stocks or assets. It’s all or nothing.
The executor can elect to use an alternate valuation date rather than the decedent’s date of death to value the property included in the gross estate.
The alternate date is generally 6 MONTHS after the decedent’s death or the earlier date of sale or distribution.
If alternate valuation is NOT ELECTED, then the FMV of the decedent’s death will be used.
What is the Basis of the Property Acquired?
= Cash paid
+ Debt Assumed
+ Cost any additional costs incurred in purchasing the property
How is Non taxable stock dividend - or stock split accounted for?
Spread the basis of his original share over both the original shares and the new shares received resulting in the SAME TOTAL BASIS but a lower basis per share of stock held.
Note Cash dividends do not impact a shareholder’s stock basis.
Inherited property- when is it long term
THIS IS ALWAYS LONG TERM!
Even if the owner dies after 1 day of holding the property, at the time of death the property becomes long term even if held just 1 day.
Estate taxes paid are not part of the basis to the Beneficiary unlike on gifts you add the gift tax on the rollover basis
Selling a gifted property sample problem
Parent gave securities with an adjusted basis of $10,000 and fair market value of $9,000 to a child. Later the child sold the securities for $7,000. What is the child’s basis for the securities sold?
A. $7,000 B. $9,000 C. $0 D. $10,000
Explanation
Choice “B” is correct. Gifted property generally retains the cost basis it had in the hands of the donor at the time of the gift. An exception applies, however, if the fair market value at the date of the gift is lower than the cost basis. In such situations, the donee’s basis depends on the donee’s future selling price of the asset. If the sales price exceeds the donor’s cost basis, the donee’s basis equals the donor’s cost basis. If the sales price is less than the donor’s cost basis but is greater than the fair market value at gift, the donor’s basis equals the sales price. If the sales price is less than donor’s cost basis and fair market value, the donee’s basis equals fair market value, which is applicable to this situation. The child’s basis is $9,000 (fair market value at date of the gift) because the sales price of $7,000 is less than both the adjusted basis of $10,000 and the fair market value of $9,000.
Gift and inheritance Complex Problem
In Year 4, a taxpayer gifted an undivided one-half interest in the taxpayer’s farm to the taxpayer’s child. Title to the farm was held by parent and child as tenants in common. In Year 10, the taxpayer died and the other one-half interest in the farm was left to the same child. The taxpayer paid $40,000 for the farm in Year 1, and the fair market value of the entire farm was $100,000 at the date of the taxpayer’s death. An alternate valuation date was not elected. What is the child’s basis in the farm after the taxpayer’s death?
A. $70,000 B. $40,000 C. $100,000 D. $0
Explanation
Choice “A” is correct. The child’s basis in the farm after the taxpayer’s death is $70,000 ($20,000 original one-half interest + $50,000 other one-half interest).
A gift of an undivided one-half interest in property when the property is held as tenants in common is a complete gift, despite the possibility that the property may revert to the donor at some future time. The basis in property acquired as a gift is generally the same as the cost basis in the hands of the donor. The child’s basis in the undivided one-half interest in the farm received as a gift in Year 4 is one-half the donor’s cost basis: $40,000 Year 1 purchase price × 1/2 = $20,000.
The basis in property acquired by bequest or inheritance is the fair market value at the date of the decedent’s death if an alternate valuation date is not elected. The fair market value of the farm at the date of the taxpayer’s death was $100,000, so the child’s basis in the other one-half interest in the farm inherited in Year 10 is $50,000 ($100,000 × 1/2).
De Minimis Safe Harbor Rule
This will apply if a company has a policy of expensing low cost personal proeprty items for financial accounting purpose.
This rule limits the immediate expenses these companies can deduct for tax purpose.
If company has applicable FS or audited FS as they call it, they can expense up to $ 5k
If no AFS, they can expense up to $ 2.5k
So if the value of the PERSONAL Property is exceeding the above limits, it will be CAPITALIZE in full, no partial expense/ capitalization. Everything is Capitalized.
Property converted from PERSONAL to BUSINESS use
The Basis will be LOWER between:
- Original Cost Basis + Improvements
OR
- FMV at the date of conversion
Property converted from PERSONAL to BUSINESS use- BASIS when Sold after the Conversion
1 If its a Loss, take the lesser of FMV or adjusted cost basis at the date of conversion
The tax basis depends on whether it is sold at a GAIN or a LOSS
To determine the gain or loss, compare the selling price to the adjusted basis at the date of sale= Original Cost Basis - Depreciation Taken
If its a gain, the basis is the Adjusted basis = Original cost basis- Depreciation
Then reduce #1by any depreciation taken after the conversion to Business use
