R3-M1 Basis and Holding Period of Assets

Question 1

what are rules of purchased property?

Answer 1

• basis = cost + capital improvements

Question 2

what are rules of gifted property?

Answer 2

• rollover cost = NBV
• sale of gift at price greater than donor’s rollover basis (Gain basis): if sale of gift at price greater than cost basis, the cost basis used to calculate gain/loss is the donor’s cost basis (not the FMV)
• sale of gift at price lower than donor’s rollover basis (Loss basis): if sale of gift at price lower than FMV, the basis used to calculate gain/loss is the FMV of the gift at the time the gift was given
• sale less than rollover cost but greater than FMV (No gain/loss): if sale of gift at price in between of cost and FMV, zero gain or loss is recognized
• gift taxes paid on a gift may affect the basis of gifted property to the donee

Question 3

what are rules of inherited property?

Answer 3

• takes basis step-up or step-down to the FMV at the date of the decedent’s death
• Alternate valuation date: if validly elected by the executor, the FMV is at
  + the earlier of 6 months later after death or
  + the date of distribution/sale of the asset
• inherited property is automatically considered to be LONG TERM property regardless of how long it has actually been held.
• estate taxes paid on inherited property never affect the basis of inherited property to the beneficiary

Question 4

what are rules of capitalize or expense?

Answer 4

• expenses: cost such as repair incurred to maintain working condition and do not add significant value to the property or extend life of the property
• capitalize: cost such as improvement incurred that results in a betterment to the property, extends useful life, restores property’s value, or adapts the property to a new or different use.
• materials and supplies cost $200 or less and consumed in 1 year is expensed immediately
• De Minimis Safe Harbor:
  + applicable (audited) financial statement: costs are up to $5,000 => expense
  + unaudited financial statement: costs are up to $2,500 => expense
  + if over those amounts => capitalize entire costs