R3. Basis & Holding Period of Assets

Question 1

Basis & Holding period

1) Purchase

Answer 1

(1) Purchase

Basis = Cost + Capital Improvements

"Real = land + building 
personal = equipment "

Holding Period = Purchase date

Reduce basis for ( Accumulated depreciation)

                        Taxable income                     Basis  Taxable transaction  -> FMV         -----------------> FMV Non taxable transaction -> No -------------------> NBV  ........................................................................................

Question 2

Basis & Holding period

2) Gift

Answer 2

2) Gifts

BASIS
General Rule:
-Donor’s Rollover Cost Basis = Rollover cost = NBV
- Basis is increased by any gift tax paid

Exception:
LOWER FMV at the date of the gift
then future sale price will determine what basis to use
-Sale price > NBV ( rollover value) - USE NBV - gain
-Sale price in between NBV and FMV - use the sale price as a basis - will have no gain/loss
- Sales price < FMV - use FMV as a basis - loss

……………………………………..
Gifted property base for depreciation
- For the purpose of calculating depreciation:
Lesser of
1. Adjusted basis OR
2. FMV
………………………………..

Holding period:
= rollover cost and original holding period

Question 3

Basis & Holding period

3) Inheritance

Answer 3

3) Inheritance
= Step up (down) to FMV

GR: FMV at Date of the Death

Alternative Valuation Date 
= For FMV 
Earlier of 
- Date of distribution/sale OR 
- six months later of the death  

………………………..
Holding Period
= “Long” journey out of the grave
automatically considered to be long-term regardless of how long it has actually been held

Question 4

Capitalize or Expense

Answer 4

-Capital expenditure
GR: cost of the tangible and intangible property with a useful life of more than a year - capitalize
………………………………………….
- Repairs and maintenance vs. improvements

Repairs and maintenance - expenses

Imporvement = capitalize

• enlarges, expands, or increases
• extends the useful life
• restores property’s value or use
• new or different use

………………………………………..

Material & supplies = expense
$200 or less, or that are consumed in one year = expense
……………………………………………….
De Minimis Safe Harbor
-for low-cost personal property items
- can expense if

Audited (applicable) FS = up to $5000 each -> expense
No Audited FS = up to $2500 each -> expense

IF cost more than given amounts, the entire cost is capitalized