Basis Flashcards
Mary bought land with a building on it that she planned to use in her business. Her costs in connection with this purchase were as follows: Cash down payment $ 20,000 Mortgage on property 150,000 Survey costs 1,000 Transfer taxes 900 Charges for installation of gas lines 1,500 Back taxes owed by seller and paid by Mary 600 What is Mary’s basis in this property? A. $173,400 B. $171,500 C. $174,000 D. $172,500
$174,000 Answer (C) is correct. The basis of property is its original cost (Sec. 1012), plus certain fees and expenditures. These fees and expenditures include survey costs, transfer fee, and charges for the installation of utility services. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Consequently, the basis of the property includes the cash paid, any notes to the seller, and the liability to which the property was subject. Taxes paid by a buyer that were not the legal responsibility of the buyer are also allocated to the purchase price (they are not deductible under Sec. 164). Mary’s basis in the property is Cash $ 20,000 Mortgage 150,000 Survey costs 1,000 Transfer taxes 900 Charges for installation of gas lines 1,500 Seller’s taxes 600 $174,000
Mr. Lemon had purchased 300 shares of ABC stock in 2000 for $7 a share. In 2010, he gave 200 shares to his son Robert. At the time of this gift, the stock had a fair market value of $5 a share. In 2019, Robert sold 100 shares for $4 a share. What is Robert’s basis in the stock sold in 2019? A. $600 B. $400 C. $700 D. $500
$500
Answer (D) is correct.
Normally, when a gift is received, the donee takes the donor’s basis in the property. However, if the property’s FMV on the date of transfer is less than the donor’s basis in the property, the donee has a dual basis in the property. Since the property is resold at less than the FMV on the date of the gift, a loss results. Therefore, the donee uses the FMV at the date of the gift as his or her basis.
Mrs. N inherited property from a decedent where an estate tax return was not required to be filed. The decedent’s adjusted basis in the property at the time of death was $75,000. A local real estate agent, qualified as an appraiser, placed a valuation of $100,000 on the property at the date of death. The appraised value for state inheritance tax purposes was $90,000. What is Mrs. N’s basis in the property? A. $90,000 B. $100,000 C. $0 D. $75,000
$90,000
Answer (A) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. The value of the property for basis purposes is normally the value as appraised for the federal estate tax return, but if no federal estate tax return is required to be filed, the value as appraised for state inheritance tax purposes is used [Reg. 1.1014-3(a)]. Therefore, the basis is $90,000.
In March 2019, Jesse traded in a 2016 van for a new 2019 model. He used both the old van and the new van 75% for business. Jesse has claimed actual expenses for the business use of the old van since 2016. He did not claim a Sec. 179 deduction of the old or new van. Jesse paid $12,800 for the old van in June 2016. Depreciation claimed on the 2016 van was $7,388, which included 6 months for 2019. Jesse paid $9,800 cash in addition to a trade-in allowance of $2,200 to acquire the new van. What is Jesse’s depreciable basis in the new van? A. $9,562 B. $9,000 C. $9,009 D. $11,409
$9,562
Answer (A) is correct.
The basis of property is generally its cost (Sec. 1012). In the case of a taxable exchange of property, the cost is the value of the property given up plus any additional cash paid. The basis for figuring depreciation for the new van is the adjusted basis of the old van, $5,412 ($12,800 – $7,388), plus any additional cash paid, $9,800, minus the excess of the total amount of depreciation that would have been allowable before the trade if the old van had been used 100% for business. The depreciation under 100% business assumption, $9,850 ($7,388 ÷ .75), is reduced by the actual depreciation, $7,388, to obtain the excess total of $2,462. The total depreciable basis for the new van is $12,750 ($5,412 + $9,800 – $2,462). This total must be reduced by the amount of personal use (25%) to determine the new depreciable basis of $9,562.
In Year 1, Chim purchased 100 shares of preferred stock of Donald Corporation for $5,000. In Year 3, she received a stock dividend of 20 additional shares of preferred stock in Donald. On the date of the distribution, the preferred stock had a fair market value of $40 per share. What is Chim’s basis in the new stock she received as a result of the stock dividend? A. $1,000 B. $800 C. $0 D. $833
$800
Answer (B) is correct.
When a tax-free distribution of stock is received by a shareholder, the basis in the new stock is determined by allocating the basis in the old stock between the new stock and the old stock. However, a distribution of preferred stock made with respect to preferred stock is included in gross income [Sec. 305(b)(4)]. Chim’s basis in the new stock received from Donald Corporation is $800 (20 shares × $40 FMV per share). This is the amount that Chim will have to include in gross income and for which she will receive a basis under Sec. 301(d).
Which of the following is the depreciable basis in rental property that is placed in service immediately upon receiving it as a gift if the donor’s basis was more than the fair market value of the property?
A. The donor’s basis of the property plus or minus any required adjustments to basis.
B. The fair market value on the date of the gift plus or minus any required adjustments to basis.
C. The fair market value of the property on the date of conversion to rental property.
D. All of the answers are correct.
The donor’s basis of the property plus or minus any required adjustments to basis.
Answer (A) is correct.
If gift property is immediately used as business property, the basis for depreciation is the donor’s AB (plus or minus any required adjustments).
The cost basis of rental property includes
A. Fees paid to the settlement attorney.
B. All of the answer choices.
C. Real estate taxes paid to the seller without reimbursement.
D. Recording fees and transfer taxes.
All of the answer choices.
Answer (B) is correct.
When a taxpayer purchases property, his or her basis in the property is initially the cost of the property. Cost basis is the sum of capitalized acquisition costs. Initial basis in purchased property is the cost of acquiring it. Only capital costs are included. One component of capital costs is closing costs, which includes brokerage commissions, pre-purchase taxes, sales tax on purchase, title transfer taxes, title insurance, recording fees, attorney fees, and document review preparation. Expenses not properly chargeable to a capital account include costs of maintaining and operating the property (e.g., interest on credit related to the property), insurance (e.g., casualty), ordinary maintenance or repairs (e.g., painting). Thus, the fees paid to the settlement attorney, the recording fees and transfer taxes, and the real estate taxes paid to the seller without reimbursement are all included in the cost basis of rental property.
Juan purchased two shares of common stock in 2019 in a company that markets biotech products. Juan paid $90 for one share and paid $110 for the next share. Later that year, the company declared a 2-for-1 common stock split. Juan’s new basis in the stock shares is
A. Two shares at $90 a share and two shares at $110 a share.
B. Four shares at $200 a share.
C. Two shares at $45 a share and two shares at $55 a share.
D. Average of the four shares at $50 a share.
Two shares at $45 a share and two shares at $55 a share.
Answer (C) is correct.
Juan purchased two shares of common stock in 2019. The first share had a basis of $90. The second share had a basis of $110. After the stock split, the first share has basis of $45 ($90 ÷ 2) and the second share has a basis of $55 ($110 ÷ 2).
You incurred the following expenditures in connection with your rental property. Which of them should be capitalized? A. New roof. B. Pave driveway. C. All of the answers are correct. D. Install new cabinets.
All of the answers are correct.
Answer (C) is correct.
Generally, expenses that add to the value of the property, substantially prolong the useful life of the property, or adapt the property to a new or different use are considered capital expenditures and are not currently deductible. Thus, capital expenditures include the cost of acquiring or constructing buildings, machinery, equipment, furniture, and any similar property that has a useful life that extends substantially beyond the end of the tax year. Maintenance and repair expenditures that only keep an asset in a normal operating condition are deductible if they do not increase the value or prolong the useful life of the asset. Installing a new roof, installing new cabinets, and paving a driveway are all major improvements that add to the value of the property.
Mr. Pine purchased a small office building during the year. Included in his costs were the following: Cash down payment $ 50,000 Mortgage on property assumed 300,000 Title insurance 2,000 Fire insurance premiums 2,000 Attorney fees 1,000 Rent to former owner to allow Mr. Pine to occupy the office building prior to closing 4,000 What is Mr. Pine’s basis in the property? A. $353,000 B. $350,000 C. $359,000 D. $355,000
$353,000
Answer (A) is correct.
The basis of property is its original cost (Sec. 1012). The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Further, the cost of property includes necessary expenses paid in connection with the acquisition of the property. The attorney fees and title insurance are included in the cost of the property. The fire insurance premiums and rent expense, however, are not paid in connection with the acquisition of the property. Thus, the basis is $353,000 ($50,000 cash payment + $300,000 mortgage assumed + $2,000 title insurance + $1,000 attorney fees).
Lucky received a gift of stock having an adjusted basis of $12,000 and a fair market value of $7,200 at the time of the gift. Lucky sold the stock for $13,000. What is the amount of Lucky’s capital gain or loss? A. $1,000 B. $13,000 C. $0 D. $5,800
$1,000
Answer (A) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Lucky’s sale results in a $1,000 gain ($13,000 sales price – $12,000 adjusted basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of property at the date of the gift. Hence, there is no loss ($13,000 sales price – $7,200 basis).
The basis in property inherited from a decedent may be determined as follows:
A. The decedent’s basis plus any inheritance tax paid on the increased value.
B. The fair market value at the date of death or the fair market value at an alternative valuation date.
C. The fair market value at an alternate valuation date.
D. The fair market value at the date of death.
The fair market value at the date of death or the fair market value at an alternative valuation date.
Answer (B) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution, if earlier.
When would the capitalization of interest payments on credit for a building be permissible? A. In years with a net operating loss. B. During major improvements. C. Never. D. During building construction.
During building construction.
Answer (D) is correct.
Interest and taxes must be capitalized as part of building costs during the construction period.
In 2019, Christian received a gift of property from his mother that had a fair market value of $50,000. Her adjusted basis was $20,000. She paid a gift tax of $6,300. What is Christian’s basis in the property? A. $56,300 B. $25,400 C. $26,300 D. $50,000
$25,400 Answer (B) is correct. The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)], increased by a gift tax paid applicable to appreciation [Sec. 1015(d)]. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax. Donor’s adjusted basis $20,000 Gift tax* 5,400 Donee’s basis $25,400
*$50,000 - $20,000 / $50,000 - $15,000 * $6,300 = $5,400
Donna received land as a gift from her grandfather. At the time of the gift, the land had a fair market value of $80,000 and an adjusted basis of $100,000 to Donna’s grandfather. One year later, Donna sold the land for $105,000. What was her gain or loss on this transaction? A. $5,000. B. $20,000. C. No gain or loss. D. $15,000.
$5,000.
Answer (A) is correct.
The FMV of the land was less than the donor’s basis in the land ($100,000) at the date of transfer. Therefore, Donna (the donee) has a dual basis in the land. The grandfather’s (donor’s) basis is used since the property is subsequently sold at a gain. Donna’s sale results in a $5,000 gain ($105,000 sales price – $100,000 basis).
Derrick received several acres of land from his father as a gift. At the time of the gift, the land had a fair market value of $85,000. The father’s adjusted basis in the land was $105,000. Two years later, Derrick sold the land for $90,000. No events occurred that increased or decreased Derrick’s basis in the land. What was Derrick’s gain or loss on the sale of the land? A. $5,000 B. $0 C. $(15,000) D. $20,000
$0
Answer (B) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Derrick’s sale results in no gain ($90,000 sales price – $105,000 basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Hence, there is no loss ($90,000 sales price – $85,000 basis).
In 2017, Melanie Tyson bought 100 shares of XYZ stock for $1,000, or $10 a share. In 2018, she bought 100 shares of XYZ stock for $1,600, or $16 a share. In 2019, XYZ declared a 2-for-1 stock split. Which of the following is true?
A. Melanie now has 200 shares with a basis of $5 per share and 200 shares with a basis of $8 per share.
B. Melanie now has 200 shares with a basis of $5 per share.
C. Melanie now has 200 shares with a basis of $8 per share.
D. Melanie now has 400 shares with a basis of $6.50 per share.
Melanie now has 200 shares with a basis of $5 per share and 200 shares with a basis of $8 per share.
Answer (A) is correct.
A distribution of common stock as a stock split is generally a tax-free distribution. The basis of the original stock is allocated between it and the new stock based on their relative fair market values. The 100 shares purchased in 2017 have a basis of $1,000 (100 shares × $10 per share), which must be allocated to the additional 100 shares from the stock split. The basis for the 2017 stocks will be $5 per share ($1,000 ÷ 200). The 100 shares purchased in 2018 have a basis of $1,600 (100 shares × $16), which must be allocated to the additional 100 shares from the stock split. The basis for the 2018 stocks will be $8 per share ($1,600 ÷ 200).
In 2018, Tony received a gift of 200 shares of mutual funds stock. The stock was worth $20,000 when Tony received it. The donor had originally paid $10,000 for the stock when he bought it in 2014. Tony sold the stock for $15,000 in 2019. What is Tony’s basis in the stock, disregarding gift tax? A. $20,000 B. $15,000 C. $10,000 D. $0
$10,000
Answer (C) is correct.
The basis of the gift Tony received equals $10,000. The FMV at the date of the gift equals $20,000. Since the FMV exceeds the donor’s basis in the stock, Tony must use the basis of the donor, $10,000.
On February 15 of the current year, Gary purchased 150 shares of common stock in T Corporation for $60 per share. Three months later he purchased 50 more shares at $90 per share. On December 15 of the current year, Gary received a 20% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Gary’s basis in each share of stock?
A. 180 shares at $60 per share and 60 shares at $75 per share.
B. 180 shares at $50 per share and 60 shares at $75 per share.
C. 240 shares at $56.25 per share.
D. 180 shares at $60 per share and 60 shares at $90 per share.
180 shares at $50 per share and 60 shares at $75 per share.
Answer (B) is correct.
The stock dividend made by T Corporation is a tax-free distribution under Sec. 305(a). The basis of the new stock is determined by allocating the basis of the old stock between the new stock and the old stock [Sec. 307(a)]. This allocation of basis in the stock is made based on the relative fair market values on the date of distribution for each of the two different blocks of stock, rather than by averaging them. Gary owns 180 (150 + 30) shares with a basis of $9,000, or $50 per share and 60 (50 + 10) shares with a basis of $4,500, or $75 per share.
Mr. Back received land as a gift from his uncle. At the time of the gift, the land had a fair market value of $7,000 and an adjusted basis of $9,500 to Mr. Back’s uncle. One year later, Mr. Back sold the land for $8,000. What was his gain or loss on this transaction? A. $1,500 loss. B. No gain or loss. C. $1,000 gain. D. $2,000 gain.
No gain or loss.
Answer (B) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Mr. Back’s sale results in no gain ($8,000 sales price – $9,500 basis = no gain).
For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Hence, there is no loss ($8,000 sales price – $7,000 basis = no loss).
In 2017, Paul received a boat as a gift from his father. At the time of the gift, the boat had a fair market value of $60,000 and an adjusted basis of $80,000 to Paul’s father. After Paul received the boat, nothing occurred affecting Paul’s basis in the boat. In 2019, Paul sold the boat for $75,000. What is the amount and character of Paul’s gain? A. Long-term capital loss of $5,000. B. Neither a gain nor a loss. C. Long-term capital gain of $15,000. D. Ordinary income of $15,000.
Neither a gain nor a loss.
Answer (B) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Paul’s sale results in no gain ($75,000 sales price – $80,000 basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Hence, there is no loss ($75,000 sales price – $60,000 basis).
Harry purchased one share of common stock in a computer company for $90. Shortly after he purchased it, the corporation distributed two new shares of common stock for each share held. What is his basis for each of the three shares of common stock? A. $30 B. $90 C. $0 D. $180
$30
Answer (A) is correct.
A proportionate distribution of stock issued by the corporation is generally not gross income to the shareholders. A shareholder allocates the aggregate adjusted basis (AB) in the old stock to the old and new stock in proportion to the FMV of the old and new stock. Basis is apportioned by relative FMV to different classes of stock if applicable. Since the distribution occurred shortly after Harry’s purchase of the stock, it can be assumed that the FMV of his one stock is equal to the FMV of the distribution. Since he owns three shares after the distribution, his original basis must be divided by three shares to arrive at his basis per share of common stock. Thus, his basis in each of his three shares is equal to $30 ($90 ÷ 3 shares).
Alex bought four shares of common stock for $200. Later the corporation distributed a share of preferred stock for every two shares of common. At the date of distribution, the common stock had a FMV of $60 and preferred stock had a FMV of $40. What is Alex’s basis in the common stock and the preferred stock after the nontaxable stock dividend? A. $200 common; $80 preferred. B. $150 common; $50 preferred. C. $240 common; $80 preferred. D. $60 common; $40 preferred.
$150 common; $50 preferred.
Answer (B) is correct.
Since the preferred stock dividend was nontaxable, the original basis of the common stock would be allocated between the common stock and the preferred stock based on the relative fair market values of each on the date of the stock dividend (Reg. 1.307-1). The market values of Alex’s common and preferred stock on the date of the dividend were $240 and $80, respectively. Alex’s tax basis in the common stock after the receipt of the dividend is $150 [($240 ÷ $320) × $200]. Alex’s tax basis in the preferred stock is $50 [($80 ÷ $320) × $200].
Rick, an electrician, needed a new service van. He was a frequent customer of Eldon’s Grill. Eldon wanted to remodel his kitchen. Eldon offered to sell his catering van, fair market value $10,000, to Rick for $8,000 and pay $1,000 cash in return for Rick’s rewiring his kitchen. If Rick agrees to do the work under these terms, what will be his basis in the van received? A. $9,000 B. $11,000 C. $8,000 D. $10,000
$10,000
Answer (D) is correct.
When property or services are exchanged between parties it is considered bartering. Bartered services or goods are included in gross income at the fair market value of the item(s) received in exchange for the services. If the parties have agreed prior to the exchange what the value of the services is, that value will be considered the fair value. Rick has traded $7,000 plus his services for a $10,000 van. The basis of the van is $10,000 to Rick and he reports $3,000 of income for his services provided.
Linda received land as a gift from her grandmother. At the time of the gift, the land had a fair market value of $60,000 and an adjusted basis of $70,000 to Linda’s grandmother. One year later, Linda sold the land for $85,000. What is the amount of Linda’s gain on this transaction? A. $25,000 B. $15,000 C. $85,000 D. $10,000
$15,000
Answer (B) is correct.
The basis of property acquired by gift is generally the donor’s adjusted basis, plus any gift tax attributable to appreciation (Sec. 1015). This rule applies when the donee determines any gain on a sale of the property. Since no gift tax was paid attributable to appreciation, Linda’s basis is the same as her grandmother’s, or $70,000. Therefore, she must recognize a $15,000 gain ($85,000 sales price – $70,000 basis).
Mr. Apple and Ms. Melon purchased a small apartment house at the beginning of 2012 for $400,000, which they held for investment. Each furnished one-half of the purchase price, and each had a half interest in the income from the property. They held the apartment in joint tenancy with the right of survivorship (i.e., a tenancy in which the interest of the first tenant to die passes to the survivor on the death of the first tenant to die). They depreciated the apartment house at the rate of $10,000 per year. On December 31, 2019, Mr. Apple died. At the date of Mr. Apple’s death, the apartment house had an adjusted basis (cost minus depreciation) of $320,000 and a fair market value of $550,000. What is Ms. Melon’s basis as of the date of Mr. Apple’s death? A. $400,000 B. $500,000 C. $435,000 D. $320,000
$435,000
Answer (C) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. Under Sec. 2040, the general rule is that the gross estate of a decedent includes the entire value of property held jointly at the time of death except that portion of the property that was acquired by the other joint owner for adequate and full consideration. In this question, each investor contributed one-half of the purchase price. Therefore, when Mr. Apple died, his gross estate included only one-half of the apartment house. Accordingly, Ms. Melon will receive only a step-up in basis for that one-half of property included in Mr. Apple’s estate. Ms. Melon’s basis in the apartment house is $435,000 [$275,000 (1/2 of $550,000 FMV that represents Mr. Apple’s portion) + $160,000 (Ms. Melon’s original one-half basis in the property of $200,000 minus her share of depreciation of $40,000)].
In 2019, Ivana received a vacant parcel of land from her uncle as a gift. Ivana’s uncle purchased the land in 2004 for $15,000, and at the time of the gift, the land had a fair market value of $13,000. Ivana did not have any other events that increased or decreased her basis in the gift after she received it. What is her gain if she sold her property for $17,000? A. $2,000 gain. B. $4,000 gain. C. $3,000 gain. D. $0 gain.
$2,000 gain.
Answer (A) is correct.
The donee’s basis in property acquired by gift is the donor’s basis, increased for any gift tax paid attributable to appreciation. If the FMV on the date of the gift is less than the donor’s basis, the donee has a dual basis for the property. The donor’s basis is used if the property is later transferred at a gain. Since the FMV on the date of transfer was less than the basis, Ivana has a dual basis in the property. Because she subsequently recognizes a gain, Ivana’s basis equals the donor’s basis on the date of transfer. Thus, Ivana recognizes a $2,000 gain ($17,000 – $15,000).
During the year, Billy’s father deeded him 400 acres of land. The fair market value (FMV) on the date of the transfer was $350,000. His father had paid $40,000 for the land. No gift tax was paid on the transfer. When Billy’s father died six months later, the fair market value of the land was $400,000. What is Billy’s basis in the 400 acres? A. $350,000 B. $40,000 C. $400,000 D. $310,000
$40,000
Answer (B) is correct.
The donee’s basis in property acquired by gift is the donor’s basis, increased for any gift tax paid attributable to appreciation. The donor’s basis is increased by
Gift Tax Paid * FMV (at time of gift) - Donor’s basis / FMV (at time of gift) - Annual exclusion
The donor’s basis in the property is $40,000 and no gift tax was paid on the transfer.
During the current year, Joey received a gift of property from his uncle. At the time of the gift, the property had a fair market value of $120,000 and an adjusted basis to his uncle of $80,000. Joey’s uncle paid a gift tax on the property of $21,000. What is the amount of Joey’s basis in the property? A. $80,000 B. $128,000 C. $101,000 D. $88,000
$88,000 Answer (D) is correct. The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)], increased by a gift tax paid applicable to appreciation [Sec. 1015(d)]. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax. Donor’s adjusted basis $80,000 Gift tax* 8,000 Donee’s basis $88,000
- $120,000 - $80,000 / $120,000 - $15,000 * $21,000 = $8,000
During 2019, Marnie received a gift of property from her aunt. At the time of the gift, the property had a fair market value of $150,000 and an adjusted basis to her aunt of $90,000. Marnie’s aunt paid a gift tax on the property of $20,250. What is the amount of Marnie’s basis in the property? A. $99,000 B. $110,250 C. $90,000 D. $159,000
$99,000 Answer (A) is correct. The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)], increased by any gift tax paid applicable to appreciation [Sec. 1015(d)]. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax. Donor’s adjusted basis $90,000 Gift tax* 9,000 Donee’s basis $99,000
*$150,000 - $90,000 / $150,000 - $15,000 * $20,250 = $9,000
Charles gave his daughter, Jane, a residential house. He had purchased the house for $250,000 in 2004. The fair market value on the date of the gift was $300,000. Charles had added a $25,000 roof the year before he gave it to Jane. Jane converts the house to a residential rental property within 1 year of the gift when the FMV was $320,000. Jane’s basis in the property is A. $250,000 B. $300,000 C. $275,000 D. $225,000
$275,000
Answer (C) is correct.
Real property that is converted to residential rental property has a basis that is the adjusted basis of the donor, plus the cost for any improvements or additions, minus any deductions for casualty or loss (Publication 551). The adjusted basis of the property is $275,000 ($250,000 + $25,000).
With regard to stock dividends, all of the following statements are correct EXCEPT
A. If a stock dividend is taxable, the basis of the old stock does not change.
B. In computing basis for new stock received as a result of nontaxable dividend, it is immaterial whether the stock received is identical or not to the old stock.
C. If a stock dividend is not taxable, a division must be made in the basis between the old and new stock.
D. Stock dividends are distributions made by a corporation of its own stock.
In computing basis for new stock received as a result of nontaxable dividend, it is immaterial whether the stock received is identical or not to the old stock.
Answer (B) is correct.
If stock is received that is a different class of stock, the basis is apportioned to the new stock according to its respective fair market value rather than its original basis.
Eric owns several buildings throughout his state of residence. Costs related to these buildings include insurance and interest on credit used to secure the buildings. Eric recently performed maintenance on one of the buildings and installed rain gutters on another. The collective basis of the buildings will include the cost of the A. Installation. B. Maintenance. C. Interest on credit. D. Insurance and installation.
Installation.
Answer (A) is correct.
Major improvements, such as installing new gutters, are capitalized and included in the basis of property.
Mr. More inherited 2,000 shares of Corporation Zero stock from his father, who died on March 4, 2019. His father paid $10 per share for the stock on September 4, 1992. The fair market value of the stock on the date of death was $50 per share. On September 4, 2019, the fair market value of the stock was $60 per share. Mr. More sold the stock for $75 per share on July 3, 2019. The estate qualified for, and the executor elected, the alternate valuation date. An estate tax return was filed. What was Mr. More’s basis in the stock on the date of the sale? A. $120,000 B. $100,000 C. $150,000 D. $130,000
$150,000
Answer (C) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution if earlier. Mr. More’s basis in the stock is $150,000, the fair market value on the date of sale (2,000 shares × $75 per share).
Mr. King inherited 100 shares of Corporation LX stock from his father, who died on March 4, 2019. His father paid $17 per share for the stock on May 3, 1994. The fair market value of the stock on the date of death was $63 per share. On September 4, 2019, the fair market value of the stock was $55 per share. Mr. King sold the stock for $68 per share on December 3, 2019. The executor of the estate did not elect the alternate valuation date for valuing the father’s estate. An estate tax return was filed. What was Mr. King’s basis in the stock on the date of the sale? A. $1,700 B. $4,600 C. $5,500 D. $6,300
$6,300
Answer (D) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the alternate valuation date for the estate tax return is elected by the executor, the basis of the assets is their fair market value 6 months after death. Mr. King’s basis in the stock is the $6,300 fair market value on March 4 (the date of his father’s death).
Mr. T purchased an apartment building on December 15 of the current year. Mr. T’s costs in connection with the purchase were as follows: Cash paid to seller $25,000 Secured notes to seller 55,000 Assumed an existing mortgage on the property 15,000 Sales commission paid to broker 3,000 Transfer taxes 600 Paid back taxes owed by seller 700 Paid interest on mortgage from date of purchase to end of December 100 What is the amount of Mr. T’s basis in the building? A. $80,000 B. $99,300 C. $99,400 D. $95,600
$99,300 Answer (B) is correct. The basis of property is its original cost (Sec. 1012), reduced by allowable depreciation [Sec. 1016(a)(2)]. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Consequently, the basis of the property includes the cash paid, any notes to the seller, and the liability to which the property was subject. Closing costs such as commissions paid to a broker are also included as part of the purchase cost. Taxes paid by a buyer that were not the legal responsibility of the buyer are also allocated to the purchase price (they are not deductible under Sec. 164). Mortgage interest paid is deductible under Sec. 163 (not included in cost). Mr. T’s basis in the building is Cash $25,000 Secured notes 55,000 Mortgage 15,000 Sales commission 3,000 Transfer taxes 600 Seller’s taxes 700 $99,300
Jerry received 2 acres of land valued at $10,000 as a gift. The donor’s adjusted basis was $12,000. Jerry subsequently sold the land for $20,000. For purposes of computing his gain, what is Jerry’s basis in the land? A. $2,000 B. $8,000 C. $10,000 D. $12,000
$12,000
Answer (D) is correct.
If the FMV on the date of the gift is less than the donor’s basis, the donee has a dual basis for the property. The FMV at the date of the gift is used if the property is later transferred at a loss. The donor’s basis is used if the property is later transferred at a gain. Since the land was sold at a gain, Jerry’s basis in the land is the same as the donor’s basis, or $12,000.
During 2003, John purchased 50 shares of common stock in Corporation D for $4,500. In 2014, D declared a stock dividend of 20%. The new stock received by John in the stock dividend was identical to the old stock. In 2019, D’s stock split 3-for-1 at a time when the fair market value was $120 per share. What is John’s basis in each of his shares of D’s stock if both distributions were nontaxable?
A. $120 per share.
B. $25 per share.
C. $75 for 60 shares and $142.50 for 120 shares.
D. $90 for 50 shares and $0 for all additional shares.
$25 per share.
Answer (B) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The same is true for a stock split. Under Sec. 307(a), the basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share is calculated as total basis divided by total number of shares. John’s total number of shares is 180 [(50 + 10) × 3]. His basis per share is $25 ($4,500 ÷ 180 shares).
Ms. Willow operated a small manufacturing plant. During the year, she took delivery on a new plastic mold stamping machine. Her cost included the following: Cost of machine $88,000 Sales tax 4,000 Freight charges to deliver property to her 1,500 Excise taxes 2,000 What is Ms. Willow’s basis in the machine? A. $95,500 B. $89,500 C. $93,500 D. $88,000
$95,500 Answer (A) is correct. Under Sec. 1012, the basis of property is the cost of the property. Sales and excise taxes paid in connection with the acquisition of property are treated as a cost of the property [Sec. 164(a)]. Delivery, installation, and freight charges are also included as part of the cost of the property. Basis is computed as follows: Purchase price $88,000 Sales tax 4,000 Freight charges 1,500 Excise taxes 2,000 Basis in equipment $95,500
A taxpayer purchases real estate rental property for $150,000. She pays $25,000 cash and obtains a mortgage for $125,000. She pays closing costs of $8,000, which includes $4,000 in points on the mortgage and $4,000 for bank fees and title costs. The basis in the property is
A. $150,000 depreciation, $8,000 amortization.
B. $158,000, depreciation only.
C. $33,000 depreciation, $125,000 amortization.
D. $154,000 depreciation, $4,000 amortization.
$154,000 depreciation, $4,000 amortization.
Answer (D) is correct.
A taxpayer may include the costs from settlement at closing when buying real property. The following may be included in the basis:
Abstract fees
Charges for installing utility services
Legal fees
Recording fees
Surveys
Transfer fees
Owner’s title insurance
Any amounts the seller owes that the taxpayer agrees to pay
However, the following are not included in settlement costs and thus are not a part of the depreciable basis:
Fire insurance premiums Rent for occupancy of property before closing Any bills incurred for utilities or other services related to occupancy of property before closing Charges connected with getting the loan a. Points b. Mortgage insurance premiums c. Loan assumption fees d. Cost of a credit report e. Fees for an appraisal required by a lender Fees for refinancing a mortgage When these costs are incurred in a trade or business, 1.-3. from the list above are classified as business expenses and 4.-5. from the list above must be capitalized as a cost of obtaining the loan and amortized over the life of the loan (Pub. 551). Thus, the depreciable basis is $154,000 ($25,000 cash + $125,000 mortgage + $4,000 bank fees and title costs), and the $4,000 for points is the basis for amortization over the life of the mortgage.
On January 3, 2019, Irene purchased 300 shares of common stock in Corporation Y for $120 per share. Four months later, she purchased 100 additional shares at $180 per share. On December 10, 2019, Irene received a 20% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Irene’s basis in each share of stock after the stock dividend?
A. 360 shares at $100 per share and 120 shares at $150 per share.
B. 480 shares at $112.50 per share.
C. 360 shares at $120 per share and 120 shares at $150 per share.
D. 360 shares at $120 per share and 120 shares at $180 per share.
360 shares at $100 per share and 120 shares at $150 per share.
Answer (A) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share should be calculated as total basis divided by total number of shares. Because there are two sets of identical stocks with different bases, the basis calculation is done on a pro rata basis. The stock dividend is equal to 80 shares (400 × 20%). Thus, 360 shares [300 + .75(80)] will have a basis equal to $100 per share ($36,000 ÷ 360), and 120 shares [$100 + .25(80)] will have a basis equal to $150 per share ($18,000 ÷ 120).
The basis of property acquired by purchase includes all of the following EXCEPT
A. Freight, installation, and testing charges.
B. Sales tax charged on the purchase.
C. Unstated interest on any time-payment plan.
D. Amount paid in notes to the seller.
Unstated interest on any time-payment plan.
Answer (C) is correct.
The basis of purchased property does not include unstated interest on time-payment plans. Interest is deductible as an expense.
