Cost Basis

Question 1

Basis is

Answer 1

amount of a taxpayers investment in a property for tax purposes

Question 2

How is a gain or loss determined

Answer 2

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

Question 3

Only property used for business is

Answer 3

depreciable

Question 4

basis of property is usually

Answer 4

the cost of the property

Question 5

Cost basis includes

Answer 5

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

Question 6

Original basis is adjusted - increased/decreased by…

Answer 6

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

Question 7

Land is not

Answer 7

depreciable

Question 8

Calculating depreciation - (land, structure)

Answer 8

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

Question 9

What fees are included in Taxpayers basis?

Answer 9

settlement fees and closing costs

Question 10

Taxpayers basis does NOT include

Answer 10

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

Question 11

What are the
Settlement fees included in cost basis

Answer 11

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

Question 12

Settlement fees NOT included in cost basis

Answer 12

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

Question 13

Adjusted Basis

Answer 13

increase/decrease made to cost of the property

Question 14

What Increases - basis of property

Answer 14

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

Question 15

Decrease - Basis of property

Answer 15

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

Question 16

Receive property for services performed

Answer 16

must include income - amount included in income becomes the basis

Question 17

if amount agreed before services performed…

Answer 17

price accepted at FMV

Question 18

What is the Basis when Purchase item is less than FMV

Answer 18

Basis is - purchase price plus amt included in income.

Find difference between PURCHASE price and FMV

must be included in income

Question 19

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

Answer 19

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

Question 20

Involuntary Conversions - non related property

Answer 20

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

Question 21

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

Answer 21

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

Question 22

FMV less than donor’s adjusted basis

What is rule is applied? Why?

Answer 22

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

Question 23

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

Answer 23

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

Question 24

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

Answer 24

basis is same as donor’s basis

Question 25

step-up in basis

Answer 25

FMV GREATER than decedents basis

Question 26

Property changed to business/rental use

Answer 26

Depreciation may be calculated once converted to rental

Question 27

Basis of depreciation is lessor of the following

Answer 27

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

Question 28

Stocks and bonds - basis Nontaxable stock dividends or stock splits - Does ownership change?

Answer 28

ownership does not change

Question 29

return of capital (non-dividend distributions)

Answer 29

reflects return of capital - basis is reduced

Question 30

When or how is basis adjusted - Subsequent transactions - basis

Answer 30

FIFO - Basis used first

Question 31

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

Answer 31

may us FIFO OR average costs

Question 32

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

Answer 32

75,000+25,000+4,000=104,000 No points (4,000) included

Question 32

Wash sale

Answer 32

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

Question 33

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?

Answer 33

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)

Question 34

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

Answer 34

A replacing roof

Question 35

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??

Answer 35

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

Question 36

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

Answer 36

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

Question 37

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

Answer 37

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

Question 38

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?

Answer 38

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

Question 39

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?

Answer 39

50 shares remain 200*30=6000 plus 100 transaction = 6100 6100/200=30.50 per share 30.50*150= 4,575

Question 40

gift of 20 shares basis - 400 FMV - 300 sold - 280 Income tax effect?

Answer 40

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