REG 3 - Basis and Holding Period of Assets

Question 1

What are three ways to legally acquire an asset?

Answer 1

1) Purchase
2) Gift
3) Inherit

Question 2

What is the basis for purchased property?

Answer 2

Cost + Capital Improvements - Depreciation Expense

Question 3

Define the difference between real property and personal property?

Answer 3

Real property - Land and building

Personal property - Machinery and equipment

Question 4

What is the holding period for purchased property?

Answer 4

Purchase date

Question 5

Define “spreading” adjustments as it relates to basis?

Answer 5

Basis is spread over the new amount of shares.

E.g. Greller owns 100 shares of stock bought at $10,000. There is a stock split. The original basis was $100/share ($10,000/100). The new basis is $50/share ($10,000/50).

Question 6

What is the general rule for basis of gifted property? What are the exceptions?

Answer 6

The general rule of gifted property is that it is the donor’s rollover cost basis/NBV.

Exception: The basis is changed if:

1) The selling price is higher than cost and FMV.
2) The selling price is lower than cost and FMV.
3) The selling price is between cost and FMV.

Question 7

How are gains/losses calculated for the following exceptions related to gifted property:

1) The selling price is higher than cost and FMV.
2) The selling price is lower than cost and FMV.
3) The selling price is between cost and FMV.

Answer 7

1) The selling price is higher than cost and FMV:
- Use donor’s basis to determine gain
- The gain is the difference between the sale price and the donor’s basis

2) The selling price is lower than cost and FMV:
- Use “lower FMV at date of gift” to determine loss
- The loss is the difference between the lower FMV and the sale price

3) The selling price is between cost and FMV.:
- No gain or loss

Question 8

What is the holding period for gifted property?

Answer 8

1) The recipient of the gift normally assumes the donor’s holding period.
- However, if FMV at the time of the gift is used as the basis of the gift, THEN the holding period starts as of the date of the gift.

Question 9

What is the general rule for basis of inherited property? What is the exception?

Answer 9

The general rule of inherited property is that it is the date of death FMV.

Exception: The basis is changed if the alternated valuation date is elected for FMV.

1) If the alternated valuation date is elected, the asset is valued at FMV at the earlier of:

• distribution date of asset or
• six months after death

Question 10

What is the holding period of inherited property? Short-term or long-term?

Answer 10

Inherited property is automatically long-term

Question 11

Explain if taxpayer expenses or capitalizes following:

• Materials and supplies
• Amounts paid to acquire property
• Improvements
• Intangible property

Answer 11

• Materials and supplies = EXPENSE
• Amounts paid to acquire property = CAPITALIZE
• Improvements = CAPITALIZE
• Intangible property = CAPITALIZE

Question 12

Explain the de minimus rule?

Answer 12

Companies can expense purchases of assets if:

• There is an applicable financial statement AND a written accounting policy.

If there is an applicable financial statement AND a written accounting policy then:
$5,000 PER ASSET can be expensed

If there is no applicable financial statement AND/OR a written accounting policy then:
$2,500 PER ASSET can be expensed

Question 13

Explain safe harbor election of routine maintenance?

Answer 13

Qualifying small taxpayers can expense costs related to a building if they do not exceed 2% of unadjusted basis of building OR $10,000.

Question 14

What is a qualifying small taxpayer for safe harbor election of routine maintenance?

Answer 14

• Annual gross receipts of $10 million or less during the three preceding tax years
• Eligible building with an unadjusted basis that does not exceed $1 million.