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.