Sec.4 - Ch.6: Basis, Depreciation, & Cost Recovery

Question 1

How is basis calculated?

Answer 1

Basis is a taxpayer’s initial investment in any asset or property right increased by legal fees, commissions, sales tax, freight, and improvements (but NOT repairs, real estate taxes, or normal business expenses)

Question 2

How is Adjusted Cost Basis calculated?

Answer 2

Cost basis less cost recovery (deductions)

Question 3

What is the Basis of a property received as a gift?

Answer 3

The value of the gift for gift tax purposes is its FMV at the date of the gift

Question 4

What is the basis if the FMV on the date of a gift is greater than the donor’s adjusted basis?

Answer 4

It’s the donor’s adjusted basis

Question 5

What is the basis on an inherited property?

Answer 5

Its FMV on the date of the decedent’s death or the alternative valuation date if elected

Question 6

How is marital property basis handled in Community Property states?

Answer 6

There is a full step-up in basis if at least one-half of the whole property is includible in the deceases spouse’s gross estate

Question 7

How is marital property basis handled in Non-Community Property states?

Answer 7

property only gets a half step-up in basis

Question 8

What is the holding period for inherited property?

Answer 8

Always treated long term regardless of actual holding period

Question 9

What is cost-recovery?

Answer 9

They are deductions allowed for the exhaustion and presumed wear and tear of property used in a trade or business or held for the production of income

Question 10

What is the Modified Accelerated Cost Recovery System (MACRS)

Answer 10

Applies to all recovery property (not land or intangibles) placed in service after 1986
- Straight-line is an option under MACRS; but half-year convention must be used

Question 11

What is included in the 5-year Property Class? Is it is a section 1245 or 1250 property?

Answer 11

Computers, autos, and light duty trucks
- It’s section 1245 property

Question 12

What is included in the 7-year Property Class? Is it is a section 1245 or 1250 property?

Answer 12

Office Furniture and fixtures
- It’s section 1245 property

Question 13

What is included in the 27 1/2-year Property Class? Is it is a section 1245 or 1250 property?

Answer 13

Residential rental property
- It’s section 1250 property

Question 14

What is included in the 39-year Property Class? Is it is a section 1245 or 1250 property?

Answer 14

Nonresidential real property
- It’s section 1250 property

Question 15

How do you calculate MACRS/Straight-Line?

Answer 15

Use cost basis of the property and multiply it by recovery year percentage (MACRS & Straight-Line)

Question 16

Under what section are businesses allowed to expenses instead of capitalize?

Answer 16

Section 179

Question 17

What is the 179 Deduction? What type of property can be deducted? What is the limit? Can you create a loss with Section 179? Can the election be carried over?

Answer 17

When a business can expense up to $1,220,000 of qualifying property in the year of acquisition
- Qualifying property is usually tangible personal property (section 1245) purchased for a trade or business
- Limited to the taxable income derived from the active conduct by the taxpayer of any trade or business
- No, you cannot create a loss
- Yes, you are allowed to carry over deductions beyond the limit

Question 18

What is amortization?

Answer 18

The recovery of certain capital expenditures that are not ordinarily deductible in a manner that is similar to straight-line