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Enrolled Agent 2023 > Cost Basis > Flashcards

Cost Basis Flashcards

1
Q

Basis is

A

amount of a taxpayers investment in a property for tax purposes

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2
Q

How is a gain or loss determined

A

by subtracting the adjusted basis from the proceeds of the sale, exchange or other disposition of property

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3
Q

Only property used for business is

A

depreciable

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4
Q

basis of property is usually

A

the cost of the property

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5
Q

Cost basis includes

A
  1. commissions
  2. sales tax freight, installation and testing
  3. legal/accounting fees
    4.excise taxes
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6
Q

Original basis is adjusted - increased/decreased by…

A
  1. improvements to property
  2. deductions for depreciation
  3. deductions for casualty losses
  4. claiming certain credits will reduce basis
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7
Q

Land is not

A

depreciable

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8
Q

Calculating depreciation - (land, structure)

A

Must allocate a portion of the purchase price to land prior to calculating depreciation

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9
Q

What fees are included in Taxpayers basis?

A

settlement fees and closing costs

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10
Q

Taxpayers basis does NOT include

A

fees and costs for getting a loan on the property (points)

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11
Q

What are the
Settlement fees included in cost basis

A
  1. abstract fee
  2. charges for installing utility services
  3. legal fees
  4. recording fees
  5. survey fees
  6. transfer taxes
  7. owner’s title insurance
  8. back taxes/interest, any amts buyer agrees to pays the seller
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12
Q

Settlement fees NOT included in cost basis

A
  1. Casualty insurance premiums
  2. rent for occupancy of property
  3. charges for utilities/other services related to property
  4. Fees to get the loan (points) - points do not increase basis
  5. Fees for refinancing
  6. Amts placed in escrow
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13
Q

Adjusted Basis

A

increase/decrease made to cost of the property

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14
Q

What Increases - basis of property

A

Capital improvements
assessments for local improvements (sidewalks, water connections, utility services etc)

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15
Q

Decrease - Basis of property

A

non-dividend distributions
Casualty and theft losses
Depreciation & Section 179 Deduction
Easements (compensation for granting easement)
Certain Credits

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16
Q

Receive property for services performed

A

must include income - amount included in income becomes the basis

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17
Q

if amount agreed before services performed…

A

price accepted at FMV

18
Q

What is the Basis when Purchase item is less than FMV

A

Basis is - purchase price plus amt included in income.

Find difference between PURCHASE price and FMV

must be included in income

19
Q

What is the basis when Involuntary Conversions - Similar or related property occurs?

A

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

20
Q

Involuntary Conversions - non related property

A

cost of property plus gain of the not recognized by the conversion

21
Q

Property Given as a gift - basis - what do you need to know

A
  1. Donor’s adjusted basis
  2. fair market value at time of gift
  3. if any gift tax was pain
22
Q

FMV less than donor’s adjusted basis

What is rule is applied? Why?

A

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

23
Q

FMV >= Donor’s adjusted basis
What basis do you use?
What is the formula?

A

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

24
Q

What is the basis when property transferred to spouse (same as divorce)

A

basis is same as donor’s basis

25
Q

step-up in basis

A

FMV GREATER than decedents basis

26
Q

Property changed to business/rental use

A

Depreciation may be calculated once converted to rental

27
Q

Basis of depreciation is lessor of the following

A
  1. FMV of property on the date of change
  2. adjusted basis on the date of the change
28
Q

Stocks and bonds - basis Nontaxable stock dividends or stock splits -

Does ownership change?

A

ownership does not change

29
Q

return of capital (non-dividend distributions)

A

reflects return of capital - basis is reduced

30
Q

When or how is basis adjusted - Subsequent transactions - basis

A

FIFO - Basis used first

31
Q

Mutual Funds - basis What is the method used to calculated basis for Mutual Funds?

A

may us FIFO OR average costs

32
Q

Purchase rental property
Financed - 75,000
Cash down $25,000
Points - 4,000
Settlement fees - 4000

Basis of property?

A

75,000+25,000+4,000=104,000

No points (4,000) included

32
Q

Wash sale

A

securities sold at a loss - w/in 30 days before/after the sale you acquire same securities

33
Q

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?

A

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)

34
Q

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

A replacing roof

35
Q

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??

A
  1. lost watch - income was deferred
  2. bought replacement - used all of the insurance money
  3. watch - basis (12,000+1000)=13,000
  4. 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

36
Q

Donor: Securities with basis of 5,000
Fmv is 6,100
Securities given to Bill
Bill sells them for 5200

Impact on income?

A

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

37
Q

H owned building basis - 400,000
FMV 510,000
Involuntary conversion -
Government pd - 530,000
H bought replacement building -360,000

What is gain ?

A
  1. did owner received less than tax basis? NO (if so loss occurred)
  2. Government pd - Basis = 530,000-400,000=130000
  3. Government pd - replacement = 530,000-360,000=170,000

130,000 is the lower amount - gain of 130,000

38
Q

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?

A

10,000*((60,000-20,000)/(60,000-15,000)) =8,889
Basis - 20,000+8,889=28,889

39
Q

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?

A

50 shares remain

200*30=6000 plus 100 transaction = 6100
6100/200=30.50 per share

30.50*150= 4,575

40
Q

gift of 20 shares
basis - 400
FMV - 300

sold - 280

Income tax effect?

A

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

Enrolled Agent 2023 (7 decks)

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