Tax Planning Basis Flashcards
What is the definition of Basis?
Basis is the denoted face value of an asset for calculating tax liability. It is the original cost plus out-of-pocket expenses that must be reported to the Internal Revenue Service when an investment is sold.
How is the Basis calculated for Gifted Property?
If the FMV at time of gift is equal to or greater than the donor’s basis, the donee’s basis is the same as the donor’s basis for all purposes. However, if the FMV is less than the donor’s basis, the donee has a dual basis for the property, that is, a basis for loss and a basis for gain. If the donee later transfers the property at a loss, the donee’s basis is the property’s FMV at the time of the gift (basis for loss). However, if the donee transfers the property at a gain, the donee’s basis is the same as the donor’s basis (basis for gain).
Step-up in Basis
The basis of property received from a decedent is generally the fair market value (FMV) of the property at the date of the decedent’s death or an alternate valuation date. This can result in either a step-up (increase) or step-down (decrease) in basis.
What is the Alternate Valuation Date?
The alternate valuation date is six months after the date of death.
If the alternate valuation date is elected, the basis for all the assets in the estate is their FMV on that date unless the property is distributed by the estate to the heirs or is sold before the alternate valuation date.
What advice would you give a sick or elderly person
Generally assets with low basis but high value should be kept until death while assets with low value and high basis ought to be disposed of first.
Basis for community property state on one spouse death
If the decedent and the decedent’s spouse own property under community property laws, one-half of the property is included in the decedent’s estate and its basis to the surviving spouse is its fair market value (FMV). The Internal Revenue Code also provides that the surviving spouse’s one-half share of the community property is adjusted to the FMV. In effect, the surviving spouse’s share of the community property is considered to have passed from the decedent.
for example. Matt and Jane, a married couple, live in Texas, a community property state, and jointly own land as community property that cost $110,000. The land has an $800,000 FMV when Jane dies, leaving all her property to Matt. His basis for the entire property is $800,000.
Basis for common property state on one spouse death
If the decedent and the decedent’s spouse own property under common property laws, one-half of the property is included in the decedent’s estate and its basis to the surviving spouse is its fair market value (FMV). In this case the original basis for the surviving spouse remains unchanged.
For example. Barry and Maria, a married couple, live in Iowa, a common law state, and jointly own land that cost $200,000. The property has a $700,000 FMV when Barry dies, leaving all his property to Maria. Her basis for the land is $450,000 [$100,000 + (0.50 x $700,000)].
Are all realized gains and losses recognized for tax purposes?
It is sometimes incorrectly believed that all realized gains and losses are recognized for tax purposes. Although most realized gains are recognized, some realized losses are not. For example, losses on the sale or exchange of property held for personal use cannot be recognized.
What is the Recovery of Basis Doctrine?
The recovery of basis doctrine states that taxpayers are allowed to recover the basis of an asset without being taxed because such amounts are a return of capital that the taxpayer has invested in the property.
What is Capitalization of Interest
Interest on debt paid or incurred to finance production expenditures incurred to construct, build, install, manufacture, develop or improve real or certain tangible personal property must be capitalized.
LIFO or FIFO method, if not specified?
FIFO
