Chapter 10 Flashcards
Purpose of Basis
The purpose of basis is to keep track of after-tax dollars an individual invests so that upon the sale of the investment, income is not taxed twice. Basis represents capital that a taxpayer uses to purchase an investment.
How do you determine basis?
Cost basis is the initial basis an investor acquires in an asset by using capital to purchase the investment. Items included in basis: purchase price, sales tax, freight, installation and testing costs, and all cost to get an asset into operation.
Adjustment to basis
Subsequent investments in the same vehicle. Additions to the investments, and changes to the investment. Decrease in basis include: distribution from business entitles that have pass-through tax treatment and depreciation deductions.
Adjusted Basis Calculation
Orginal basis on date of acquisition +capital additions-capital recoveries=adjusted basis on date of disposition
Original basis
Depends on how the property was acquired
Capital additions
include cost of capital improvements made to the property by the taxpayer.
Capital recoveries
Reduce the adjusted basis because the taxpayer has received a tax benefit.
Personal Use Asset
When an asset is purchased for personal use, its initial basis equals its cost.
Basis of Inherited Property
The basis of property that passes through a decedent’s estate is stepped to the fair market value of the asset on the date of the decedent’s death, or, if elected by the executor of the decedent’s estate, to the fair market value of the asset on the alternate valuation date. Value 6 months after date of death.
Effect of Selecting Date of Death Value
At Rex’s date of death APril 30 of this year, his assets had an adjusted basis of 200,000, and a FMC of 700,000. Date of death selected and assets distributed June 30; beneficiary basis 700,000
Basis of Gifted Property
Generally, when an individual gives property to another person, the donor’s basis carries over to the donee. The basis of property in the hands of the donee will differ from the donor’s basis when 1. the donor pays gift tax
Basis of Gifted Property Equation
If gift tax is paid the basis will be as follows.(Appreciation in the property)/(taxable gift) times gift tax paid= increase in basis for donee.
What happens when the gifted property is worth less than the donor’s basis?
In such a situation, the double basis rule applies, which states that the donee will have one basis for loss purposes and another basis for gain purposes.
Double Basis Rule
Occurs when FMV is less than donor’s basis at date of gift. If less than FMV the loss basis. Between original basis and FMV= no gain or loss. Greater than original basis, the gain basis.
Section 1041
States that regardless of whether property is sold or given to a spouse, the basis of the original owner will carry over to the new owner.
Related party transactions
When property is sold to a related party, and the sale will result in a gain to the selling party, the normal basis rules apply. But if property is sold to a related party at a loss, the double basis rule applies and the loss on the original transaction is disallowed. Follows the double basis rule except that all holding periods start at sale date.
Depreciation
A method of capital recovery that allows a taxpayer to receive his or her capital back over the useful life of the asset.
The Modified Accelerated Cost Recovery System
Applies to most types of depreciable property placed in service afer 1986. Among the classes of property that are excluded from MACRS are: intangible property, public utility property, motion pictures and sound recordings.
Depreciation of Realestate
Under current law, if the real estate is used for residential rental purposes, the property is depreciated according to the straight line depreciation method over 27 1/2 years. If real estate is used for commercial purposes depreciation occurs on a straight line basis over 39 years. Of course, the value of land cannot be depreciated only the value of improvements to land qualify for depreciation. All real estate is depreciated using a mid-month convention.
Half Year Convention
Assumes that all property placed into service, or disposed of, during a taxable year was placed into service or disposed of at the mid point of the year
Mid Quarter Convention
Assumes that all property placed into service, or disposed of, during any quarter of the taxable year was placed into service, or disposed of, at the mid-point of that quarter.
Mid Month Convention
Assumes that all property placed into service, or disposed of, during any month was placed into service, or disposed of, at the mid-point of that month.
Section 179
Provides business owners with an option to elect to expense property placed into service during the year instead of capitalizing the asset and depreciating them over their MACRS class life, provided that certain requirements are met.
What are the qualifications for Section 179?
To qualify, an asset must be used for more than 50 percent of the time in a trade or business.
T/F A business owner may elect to immediately expense up to 250,000 for 2016 of assets
False, they can expense up to 500,000 for 2016.
T/F The amount that can be immediately expensed is subject to a phaseout, and is reduced dollar for dollar for depreciable tangible personal business property placed into service during the year that exceeds 2,000,000 for 2016.
True.
Listed Property
There can be substantial limits on cost recovery of assets considered listed property.
Listed property includes:
Passenger automobile. Property used for entertainment, recreation, or amusement, computer or peripheral equipment, and cellular telephone.
T/F To be considered as predominantly used for business, business use must exceed 60%?
False, business use must only exceed 50 percent.
T/F Most assets are capital assets
True
T/F Capital assets is a catch all category that includes all assets not ordinary income assets or Section 1231 assets.`
True
Capital Assets Section 1221
Capital assets are everything in the world other than: accounts and notes receivable from trade or business, copyrights, literary, musical, and artistic creations and similar assets in the hand of the creator; inventory or stock in trade held for sale to customers in the ordinary course of business; depreciable property or real property used in trade or business; publications of the United States Government; supplies used in the ordinary conduct of trade or business; derivative instruments for commodities held by a dealer, hedging transactions entered in the normal course of business.
Section 1231 Assets
The final type of asset in our income tax system is known as section 1231 asset. Section 1231 assets are depreciable personal property or real property used for productive use in trade or business or for the production of income.
Section 1231 includes:
depreciable personal property or real property used for productive use in a trade or business or for the production of income; timber, coal, and iron to which Section 631 applies, livestock held for draft breeding, dairy or sporting purposes, un-harvested crops on land used in business, and purchased intangible assets eligible for amortization (goodwill)
