Basis of Property Flashcards
Property gifted within 1 year of death
The step-up rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent’s death. Your basis in this property is the same as the decedent’s adjusted basis in the property immediately before his or her death, rather than its FMV
Property received for services
If a taxpayer receives property for services rendered, its FMV must be included in income. The amount included in income becomes the basis of the property.
Exercised stock options
An exercised option’s cost (or proceeds) modifies the basis (or amount realized) on the underlying stock.
Put buyer – Reduces the amount realized on the sale of stock by the cost of the put
Call buyer – Adds the cost of call to the basis of stock purchased
Put writer – Reduces the basis of the stock purchased by the amount received for the put
Call writer – Increases the amount realized on sale of stock by the amount received for call
Basis of property changed from personal use to business or rental use
The basis for depreciation is the lesser of the following:
- The FMV of the property on the date of the change
- The adjusted basis on the date of the change
- If the taxpayer sells the property at a profit, the original basis (with adjustments) is used.
- If the taxpayer sells the property at a loss, the cost for purposes of determining basis is the FMV on the date of conversion (with adjustments). This rule prevents a taxpayer from shifting nondeductible losses on personal property to deductible losses on business property.
Basis of inherited community property
In community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—each spouse usually owns half of the community property. When either spouse dies, the total value of all community property, even the part belonging to the surviving spouse, can receive a step-up in basis, provided the decedent’s share is part of his or her gross estate.
Basis of inherited property
Basis is FMV on date of death or alternate valuation date (6 months from the date of death or the disposition date if earlier).
A step-up in basis occurs when the FMV is greater than the decedent’s (person who died) basis.
For joint property where one owner dies, only the portion included in the decedent’s estate receives a step-up in basis. For JTWROS, one-half of the value of the property receives a step-up in basis.
Gain on inherited property is long-term.
Basis of gift
The relationship between FMV and the donor’s basis at the time of the gift determines the basis for the donee.
- FMV greater than donor’s basis – Same as donor’s basis.
- FMV less than donor’s basis – Basis depends on value when sold (the “dual basis” rule).
- Calculate gain using donor’s adjusted basis.
- Calculate loss using FMV when the taxpayer received the gift.
If using the donor’s adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, there is neither a gain nor loss on the sale.
Wash sale
Cannot deduct loss if purchase (or acquire options to purchase) same security +/- 30 days of sale. Don’t include the date of sale in the 30 days. Add the basis of any disallowed loss to the cost of the new security. Postpone the loss deduction until the disposition of the new security.
Stock split
Percentage ownership does not change. Allocate basis proportionately to all shares. Original shares are exchanged for new shares. 2 for 1 stock split means two shares now owned for one share previously owned.
Mutual fund basis
FIFO, specific identification, or average cost method.
Stock basis
FIFO, or specific identification.
Long-term gain
Favorable tax rates compared to short-term gains. Must be held for more than 1 year. Begin counting day after purchase and include the date of sale. EXAMPLE: Buy Jan 1, 20X1 and Sell Jan, 1 20X2 is short-term because count starts Jan 2, 20X2.
