Basis Basics Flashcards
What is the fundamental rule of basis
Basis After Transaction = Basis Before Transaction +/- Recognized gain/loss
What is the caveat to the fundamental rule of basis
It gives you the total basis but it does not tell you how that basis is allocated (that is a legislative decision)
What is the difference in realization and recognition?
Realization occurs after a disposition that qualifies as a realization event
Recognition occurs when the gain/loss affects taxable income
Where is the realization doctrine codified?
It’s not. It’s assumed in the 1001(a) definition of gain or loss
What is a mark-to-market system
It kills there realization doctrine and forces taxpayers to realize gain/loss at regular intervals
Does the receipt of a dividend affect the basis in the stock? What about total basis?
It does not affect the basis in the stock because basis = cost + recognized gain/loss. It does affect total basis because you now have a basis equal to the value of the cash (or property) received in the dividend. TOTAL BASIS INCREASES IF YOU RECOGNIZE INCOME (see fundamental rule of basis
What is the consequence of a stock dividend?
Not considered a realization event, so no tax and no change in basis
What is the computation for gain?
Amount realized - Adjusted Basis
What is amount realized?
Money received + FMV of property received (form disregarded)
What is the theoretical description of FMV for amount realized?
The price property would trade at between a willing buyer and seller when netter is under a compulsion and reasonably informed
What is the practical way to find FMV of property for amount realized?
If parties bargain at arms length, you can assume that traded values are equal (US v Davis)
How do you determine FMV if the parties did not bargain at arms length?
FMV is a question of fact, so you hire experts and make a case
A sells B a car for $35K plus $2K sales tax. What is the FMV of the car?
$37K FMV because you can think of the sales tax as a commission expense paid by the seller. Amount realized is $35K because you can take out the selling expenses.
How is FMV determined if two pieces of property are received in a disposition?
If the parties are at arms length, can trust them for an aggregate value but cannot trust them for allocating that value
What are common ways to find basis?
Cost (1012) Gift (1015) Inheritance (1014)
What are common adjustments to basis
Capitalized improvements to property Increase basis
Depreciation decreases basis
Can you always deduct losses?
No - only if you can find a code provision that allows you to
what is a non-recognition provision?
It allows taxpayer to realize gains but not recognize them. Failure to recognize means there is to change to basis, but that’s a good trade for deferral
(e.g. like kind exchange)
What are the 3 steps to a non-recognition problem?
1) Gain/loss realized
2) Gain/loss recognized
3) Basis in new property
What is an easy way to check your answer on a non-recognition problem?
The gain/loss deferred should equal the built in gain/loss on the property.
Gain realized - Gain recognized = Gain Deferred
What are the 4 requirements for like kind exchange under 1031? How are they applied
1) Exchange of real estate for real estate
2) Taxpayer trades real estate for investment or for use in trade or business
3) Properties are of “like kind” (all us real estate is like kind)
4) Property traded by the tax payer cannot be held primarily for sale
(These are applied for each person so one half of the transaction can see the test while the other may not)
Why does the 1031 like kind exchange rule exists?
It could be a pain to value the real estate in a trade so we can just wait and tax it later
What are the terms for the property traded in a like kind exchange
Relinquished property = Property traded away
Replacement property = Property rec’d
What is “boot” in a like kind exchange?
Any property that does not qualify under 1031(a)
