Cost Basis Flashcards
Basis is
amount of a taxpayers investment in a property for tax purposes
How is a gain or loss determined
by subtracting the adjusted basis from the proceeds of the sale, exchange or other disposition of property
Only property used for business is
depreciable
basis of property is usually
the cost of the property
Cost basis includes
- commissions
- sales tax freight, installation and testing
- legal/accounting fees
4.excise taxes
Original basis is adjusted - increased/decreased by…
- improvements to property
- deductions for depreciation
- deductions for casualty losses
- claiming certain credits will reduce basis
Land is not
depreciable
Calculating depreciation - (land, structure)
Must allocate a portion of the purchase price to land prior to calculating depreciation
What fees are included in Taxpayers basis?
settlement fees and closing costs
Taxpayers basis does NOT include
fees and costs for getting a loan on the property (points)
What are the
Settlement fees included in cost basis
- abstract fee
- charges for installing utility services
- legal fees
- recording fees
- survey fees
- transfer taxes
- owner’s title insurance
- back taxes/interest, any amts buyer agrees to pays the seller
Settlement fees NOT included in cost basis
- Casualty insurance premiums
- rent for occupancy of property
- charges for utilities/other services related to property
- Fees to get the loan (points) - points do not increase basis
- Fees for refinancing
- Amts placed in escrow
Adjusted Basis
increase/decrease made to cost of the property
What Increases - basis of property
Capital improvements
assessments for local improvements (sidewalks, water connections, utility services etc)
Decrease - Basis of property
non-dividend distributions
Casualty and theft losses
Depreciation & Section 179 Deduction
Easements (compensation for granting easement)
Certain Credits
Receive property for services performed
must include income - amount included in income becomes the basis
if amount agreed before services performed…
price accepted at FMV
What is the Basis when Purchase item is less than FMV
Basis is - purchase price plus amt included in income.
Find difference between PURCHASE price and FMV
must be included in income
What is the basis when Involuntary Conversions - Similar or related property occurs?
basis is same as the converted property’s basis on the date of the conversion with following adjustments
a. basis - decreased
1. any loss recognized
2. money not spent on similar property
b. basis - increased
1. gain recognized on the involuntary conversion
2. any cost of acquiring replacement property
Involuntary Conversions - non related property
cost of property plus gain of the not recognized by the conversion
Property Given as a gift - basis - what do you need to know
- Donor’s adjusted basis
- fair market value at time of gift
- if any gift tax was pain
FMV less than donor’s adjusted basis
What is rule is applied? Why?
Dual basis rules
1. basis for figuring gain same as the donor’s adjusted basis
2. basis for figuring loss is its FMV when taxpayers received the gift
prevents taxpayers from shifting unrealized losses to other taxpayer
FMV >= Donor’s adjusted basis
What basis do you use?
What is the formula?
basis - adjusted donor’s basis at time of gift
Gift tax pd
gift tax pd X (FMV-Donors basis)/amt of gift)
Donor’s basis = 4500
amt of Gift = 5000
FMV=10000
gift tax pdX(10,000-4,500)/(5000)
If gift tax not paid then FMV at time of gift
What is the basis when property transferred to spouse (same as divorce)
basis is same as donor’s basis
step-up in basis
FMV GREATER than decedents basis
Property changed to business/rental use
Depreciation may be calculated once converted to rental
Basis of depreciation is lessor of the following
- FMV of property on the date of change
- adjusted basis on the date of the change
Stocks and bonds - basis Nontaxable stock dividends or stock splits -
Does ownership change?
ownership does not change
return of capital (non-dividend distributions)
reflects return of capital - basis is reduced
When or how is basis adjusted - Subsequent transactions - basis
FIFO - Basis used first
Mutual Funds - basis What is the method used to calculated basis for Mutual Funds?
may us FIFO OR average costs
Purchase rental property
Financed - 75,000
Cash down $25,000
Points - 4,000
Settlement fees - 4000
Basis of property?
75,000+25,000+4,000=104,000
No points (4,000) included
Wash sale
securities sold at a loss - w/in 30 days before/after the sale you acquire same securities
Paid 40,000 for property
John paid 1/4 -
Fred paid 3/4
Depreciation - 8,000
FMV of property at time of death 80,000
Johns Basis at time of Freds death?
John’s 1/4 of 40,000=10,000
Fred’s 3/4 of 40,000=30,000
3/4 of 80,000=60,000 (Freds portion)
Total of John’s = 70,000=60,000+10,000
1/2 of depreciation = 4,000
70,000-4,000=66,000 basis (Johns)
Costs incurred on rental property - which classified as capital improvement -
a. replacing roof
b. repainting interior walls
c. refinishing existing wood floors
d. replacing a broken window
A replacing roof
Year one -
Bought watch for 12000
FMV = 23,000
Lost watch - insurance paid = 20,000
Bought new watch for 21,000 (1,000 added of own money)
Year two -
Sold second watch for 24,000
effect on income??
- lost watch - income was deferred
- bought replacement - used all of the insurance money
- watch - basis (12,000+1000)=13,000
- sell price minus basis - 24,000-13,000=11,000
Year One - No Gain - Involuntary conversion all money used for new watch
Year Two - 11,000 gain when watch was sold
Donor: Securities with basis of 5,000
Fmv is 6,100
Securities given to Bill
Bill sells them for 5200
Impact on income?
Property received as gift
Bill - Sold at a price higher than basis of the donor
Difference is gain on sale
Basis - 5000
Sold - 5200
Gain - 200
H owned building basis - 400,000
FMV 510,000
Involuntary conversion -
Government pd - 530,000
H bought replacement building -360,000
What is gain ?
- did owner received less than tax basis? NO (if so loss occurred)
- Government pd - Basis = 530,000-400,000=130000
- Government pd - replacement = 530,000-360,000=170,000
130,000 is the lower amount - gain of 130,000
Gift given to M from K
K’s basis - 20,000
FMV - 60,000
Gift tax pd - 10,000
Annual exclusion - 15,000
M’s basis in property?
10,000*((60,000-20,000)/(60,000-15,000)) =8,889
Basis - 20,000+8,889=28,889
Received 100 shares as gift @ 1 = $100
Bought 200 shares at @30 plus 100 transaction fee
Sold 150 shares
Basis of shares that are remaining?
50 shares remain
200*30=6000 plus 100 transaction = 6100
6100/200=30.50 per share
30.50*150= 4,575
gift of 20 shares
basis - 400
FMV - 300
sold - 280
Income tax effect?
no income tax when gift was made
loss calculated - is the fmv less than basis? yes
use FMV to calculate loss
FMV-SELL PRICE = 300-280=20
No effect on income at time of gift
sold for a 20 loss
