Property Transactions: Basis

Question 1

What are the five primary types of basis?

Answer 1

(1) Cost Basis [1012]
(2) Transferred Basis
(3) Exchanged Basis
(4) Stepped-up/down basis
(5) Converted basis

Question 2

What is cost basis comprised of?(3) And what code section

Answer 2

Amount of capitalized acquisition costs [1012]
(1) Cash
(2) FMV of property given up
(3) Amounts paid via borrowed funds

Question 3

What is another term used for TRANSFERRED basis and what are the basic consequences?

Answer 3

Carryover basis. Same asset but with a new owner. Basis carries through.
Example would be gift.

Question 4

What is another term used for EXCHANGED basis and what are the basic consequences?

Answer 4

Substituted basis. Same owner but new asset. Basis taken from old asset.
Examples would be 1031 exchange and 351 contributions?

Question 5

What is converted basis and how is it calculated?

Answer 5

Converted basis is the basis property takes when it is transferred from personal to business use.
Basis is lower of cost or FMV.

Question 6

Is a rebate treated as income or reduction of purchase price?

Answer 6

Reduction of purchase price.

Question 7

What are four overarching categories of costs included under 1012 cost basis?

Answer 7

(1) Purchase Price (Stated)
(2) Miscellaneous Costs
(3) Closing Costs
(4) Major Improvements

Question 8

Does purchase price include liabilities to which the property is subject?

Answer 8

Yes

Question 9

What are commonly capitalized MISCELLANEOUS costs? (4)

Answer 9

(1) Appraisal Fees
(2) Freight
(3) Installation
(4) Testing

Question 10

What are commonly capitalized CLOSING costs? (9)

Answer 10

(1) Brokerage Commissions
(2) Pre-purchase taxes
(3) Sales Tax or self-assessed Use Tax on purchase
(4) Excise Tax
(5) Title transfer Tax
(6) Title Insurance
(7) Recording Fees
(8) Attorney Fees
(9) Document Review; Preparation

Question 11

What are commonly capitalized MAJOR IMPROVEMENTS? (5)

Answer 11

(1) New Roof
(2) New Gutters
(3) Extending water line to property
(4) Demolitions costs and losses
(5) New electrical wiring

Question 12

General difference tax treatment between repairs and improvements?

Answer 12

Repairs are expensed and improvements can be capitalized.

Question 13

What types of improvements may be capitalized?(3)

Answer 13

(1) Betterments
(2) Adaptations
(3) Restorations

Question 14

What is a Betterment for purposes of improvement capitalization?

Answer 14

Improve a defect that arose before purchase or during use; are for a material addition to the property; or improve the property’s productivity, strength, efficiency, etc.

Question 15

What is an Adaptation for purposes of improvement capitalization?

Answer 15

Change the property away from the taxpayer’s intended use when property was originally placed into service.

Question 16

What is a Restoration for purposes of improvement capitalziation?

Answer 16

Return the unit to working order from state of disrepair; rebuild the property after end of useful life; or replace a major component or substantial structural part of unit of property.

Question 17

Basic definition of FACILITATIVE costs?

Answer 17

Amounts paid to facilitate purchase of real or personal property.

Question 18

Are FACILITATIVE costs expensed or capitalized?

Answer 18

Capitalized

Question 19

What are examples of FACILITATIVE costs?

Answer 19

(1) Appraisal fees
(2) Transportation costs
(3) Inspection costs
(4) Sales and Transfer taxes
(5) Finders’ fees
(6) Title Registration costs

Question 20

What items are not included in FACILITATIVE costs and are current deductions?

Answer 20

Amounts paid to determine which property to acquire or whether to acquire it.

Question 21

What is the basic rule of UNICAP? What is the purpose and section?

Answer 21

Costs for construction (manufacturing) real (or TPP) to be used in trade or business must be capitalized. Costs of producing or acquiring property for resale to customers (retail) are capitalized.
Passed by congress to level the playing field between producers and merchandisers. Section 263A.

Question 22

What is the size threshold for application of UNICAP rules?

Answer 22

UNICAP rules must be applied if the gross receipts are higher than the threshold under 448(c). Same test as used to disqualify taxpayers from using cash method.

Question 23

What is the basic rule of the de minimis exception to the capitalization rules? What reg?

Answer 23

1.263(a)-1(f). Taxpayer can make an election to deduct rather than capitalize certain tangible property with an economic life greater than 12 months.

Question 24

What are the dollar thresholds for the de minimis exception to capitalization?

Answer 24

If FS do not have to be audited, $2,500 per item/invoice provided they use the same policy for financial accounting purposes.

IF FS are audited, $5,000 per item/invoice

Question 25

What types of loan costs increase acquisition basis?

Answer 25

(1) Notes to seller (minus unstated interest)
(2) Liabilities to which acquired property is subject

Question 26

Are costs of obtaining loans expensed or deducted over period of loan?

Answer 26

Deducted over period of loan.

Question 27

Are prepayments of interest by a cash basis taxpayer immediately expensed or deducted over period of loan?

Answer 27

Deducted over period of loan.

Question 28

Upon receipt of property for services, what are the income consequences for the recipient and how much basis do they take in the property?

Answer 28

Income is FMV of property and basis is FMV of property.

Question 29

How is basis allocated between multiple properties for a lump sum price?

Answer 29

Basis allocated based on relative FMV.

Question 30

For purposes of lump sum price basis allocation, how is FMV of each asset determined?

Answer 30

Parties may agree in writing as to allocation of purchase price or FMV of assets. Will be binding unless IRS deems improper.

Question 31

What is the residual method in relation to allocating basis in lump sum transactions?

Answer 31

The residual method is the order of priority in which basis can be allocated when assets constituting a business are sold.

Question 32

What is the order of priority for allocating basis under the residual method?

Answer 32

(1) Cash and equivalents
(2) Near-Cash Items [CDs, US gov securities, forex, and other marketable securities]
(3) AR, mortgages, and credit card receivables acquired in ordinary course of business.
(4) Property held for sale to customers in ordinary course
(5) Assets not otherwise listed [PPE, etc.]
(6) Section 197 intangibles
(7) Goodwill

Question 33

What is the basis of property received by gift?

Answer 33

Basis in hands of donor increased by any gift tax paid.

Question 34

What is the basis of gifted property with a FMV less than its basis?

Answer 34

Loss basis of FMV. Gain basis of transferred basis. If sold at value between, no gain or loss.

Question 35

What is the HP of property gifted at a loss?

Answer 35

New HP for property sold using loss basis. Tacked HP for property sold at gain basis.

Question 36

Basis of inherited property?

Answer 36

FMV at date of death or six months later if alternative valuation method elected.

Question 37

When does a wash sale occur and what are the consequences?

Answer 37

Wash sale occurs when property is sold for loss and repurchases within 30 days.
Initial loss disallowed.
Disallowed loss may be added to basis of repurchased asset.
Spouses treated as one person.