Categorizing Assets For Income Tax And Basis Rules

Question 1

3 Types of Assets

Answer 1

Capital Assets
Section 1231
Ordinary Income Assets

Question 2

Capital Assets

Answer 2

Most personal use assets and most investment assets

Question 3

Section 1231 Assets

Answer 3

Section 1245 and Section 1250 Depreciable Business Property used in a trade or business

Question 4

Ordinary Income Assets

Answer 4

Not Capital Assets and Not Section 1231 assets

Question 5

What’s NOT a Capital Asset?

Answer 5

ACID

Accounts and Notes receivable

Copyrights & creative works (if held by the creator of such works)

Inventory

Depreciable property used in a trade/business

Question 6

Original Cost Basis includes the sum of:

Answer 6

Purchase Price
FMV of any property given in taxable exchange
Sales Tax
Freight
Installation
Testing

Question 7

What are Increases to Cost Basis?

Answer 7

Capital Improvements

 - Has to extend life of asset (not repairs or maintenance)

Fixing a leaky sink is a repair, doesn’t increase basis

Question 8

What Decreases Cost Basis?

Answer 8

Depreciation taken

Section 179

Question 9

Special Basis Rules: Inherited Property

Answer 9

FMV at date of death
or
the alternate valuation date

Holding period always Long Term

Question 10

Special Basis Rules: Property received as Gift

Answer 10

General Rule is Carryover Basis - Donee’s basis is same as Donor’s basis

2 Exceptions

Question 11

Basis in Gifted Property at a Loss Position

Answer 11

At the date of gift, if the FMV < Donor’s Basis

Double Basis Rule:

Sale Price > Donor’s Basis then Donee’s basis = Donor’s

If sale price < FMV, then Donee’s basis = FMV at date of gift

If Donor’s basis > Sale Price > FMV date of gift, then Donee’s basis = Sales price (no tax consequence)

Question 12

Basis in Appreciated Property that’s Inherited or Gifted

Answer 12

Appreciated property with Gift Tax paid:

Donor Basis + [(Net appreciation in gift / Taxable Gift) x Gift tax paid]

Question 13

Holding Period for Gifted Property

Answer 13

When it’s at a gain = Carryover Holding period

When at Loss = Donee’s holding period starts at date of gift

Question 14

Basis for Divorcing Spouses?

Answer 14

Carryover basis and holding period

Question 15

Basis for Related Parties?

Answer 15

Only affects transactions where there’s a LOSS

Seller’s loss is disallowed

Buyer has double basis (FMV for losses, Seller’s basis for gains)
- new holding period for buyer in all cases

Question 16

Related Parties include and Not include:

Answer 16

Siblings (half but not step)
Children/grandkids
Parents/grandparents
Spouse

Not include:

In-laws
Aunts/Uncles
Cousins