Unit 6 - Calculating The Basis Of Assets

Question 1

Assets - taxing and types

Answer 1

In order to calculate the gain or loss when selling or disposing of an asset

Requires you to classify the asset first

Two main types of assets

Real property and personal property

Question 2

Assets – real property

Answer 2

Refers to real estate, which includes and anything permanently attached to it

Buildings
Farmland
Residential homes
Commercial properties
Rental properties
Subsurface mineral rights

Question 3

Assets – personal property

Answer 3

All assets that are not classified as real estate

Furniture
Equipment
Vehicles
Household goods
Collectibles
Livestock

Also includes in tangible assets like – stocks, trademarks, cryptocurrency, and copyrights

Question 4

Tax treatment of an asset

Answer 4

May differ, depending on whether it is intended for personal use, business purposes, or investment

Question 5

Personal property vs personal use

Answer 5

Personal property – legal and accounting term used to describe movable assets, whether or not it is used for business purposes

Personal use – refers to assets that are used personally by the taxpayer, and not for trade, business, or investment

Question 6

Basis of an asset

Answer 6

The original basis of an asset is typically its purchase price

May be cases where the basis is calculated based on the fair market value at the time of acquisition – property is inherited or gifted

Question 7

The cost basis of an asset may include:

Answer 7

Sales taxes charged during the purchase

Freight in charges and shipping fees

Installation cost, and testing fees

Delinquent real estate taxes that are paid by the buyer of a property

The cost of any major improvements to the property

Legal and accounting fees for transferring an asset

Question 8

Basis of an asset – post acquisition cost

Answer 8

Post acquisition cost can also increase the basis of an asset, including

Cost of extending utility service lines to the property and impact fees

Legal fees or court costing title to a property

Legal fees for obtaining a decrease in an assessment levied against a property to pay for local improvements

Zoning cost, and the capitalized value of a redeemable ground

Question 9

Depreciation

Answer 9

Tax deduction that allows businesses to gradually recoup the cost of assets they use overtime

Decreases the basis of an asset over the course of several years

Question 10

Depreciation – residential rental property

Answer 10

Most residential rental property is depreciated over 27.5 years

Only the value of the building can be depreciated, never the land

Question 11

Adjusted basis

Answer 11

Includes the original basis plus any increases or decreases such as

Subsequent improvements

Depreciation deductions

Casualty losses

Rebates

Insurance reimbursements

Question 12

Asset holding period

Answer 12

Short term property is held for one year or less

Long-term property is held for more than one year or at least a year plus a day

Question 13

Accurately reporting any taxable gain or loss from the sale of disposal of an asset you must identify

Answer 13

Whether the asset is personal use or use for business or investments

The assets basis or adjusted basis

The assets holding period

The proceeds from the sale

Question 14

Basis of real property - real estate

Answer 14

Usually includes a number of cost in addition to the purchase price

Certain fees and other expenses are automatically included

Real estate taxes, the seller owed

Construction Dash any expenses related to preparing the land included in the land basis

Includes settlement cost for the purchase of property - recording fees, transfer taxes, title insurance, abstract fees, installing utilities, and legal fees

Question 15

Basis, other than cost

Answer 15

An assets basis is determined by something other than the purchase cost

Property in exchange for services

Basis after casualty loss

Basis after mortgage assumption

Question 16

Property in exchange for services

Answer 16

Required to report the properties fair market value as income

This value value then becomes the basis for the property

In situations were to have agreed on a price for services before hand, this agreed-upon cost can be used to determine both the amount of income and the assets basis

Question 17

Basis after casualty loss

Answer 17

A taxpayer has a deductible casualty loss (an asset has been destroyed or diminished)

The taxpayer should increase the basis in the property by the amount spent on repairs that restore the property to its pre-casualty condition

Must also decrease the basis of the property by any related insurance proceeds

Question 18

Basis after mortgage assumption

Answer 18

Taxpayer buys a property and assumes an existing mortgage on it

The basis includes the amount paid for the property plus the amount owed on the mortgage

Also includes the settlement fees and closing cost paid to buy the property

Does not include fees and cost for obtaining alone on the property

Question 19

1099 – B

Answer 19

Proceeds from broker and barter exchange transactions

The form also includes any federal income tax that has been withheld, if any

The reporting is made to both investors and to the IRS

Question 20

Stock dividends

Answer 20

Additional shares a company grants to a shareholders, in lieu of paying cash dividends

Often nontaxable unless a cash option was given

Total basis of all the shares remains the same – decreases the basis per individual share

Question 21

Stock split

Answer 21

Stock splits are away for a company to lower the market price of its stock

Total basis of all the shares remains the same

Decreases the bases per individual share

Question 22

Basis of securities

Answer 22

When taxpayer purchases securities – basis is typically the cost of purchase plus any additional fees, such as brokers commissions

When securities are sold – investment broker should provide the taxpayer with form 1099 – B

If form 1099 – B does not include information about the taxpayers basis in the sold securities, they must provide themselves using their personal records

Failure to provide evidence of basis may result in the IRS assuming it is zero

Two types

1. Statutory stock options.
2. Non-statutory stock options.

Question 23

Stock options

Answer 23

Taxpayer may purchase options to buy or sell securities - such as stocks or commodities - through an exchange or in the open market

With a stock option, an investor can choose to buy or sell a stock at a predetermined price

The investor can exercise the option and buy or sell the underlying securities – which could result in a gain or loss from those securities

Or the investor can also choose to sell the option itself, which can result in gain or loss

Question 24

ISO’s

Answer 24

Incentive stock options

Companies offer stock options to their employees as a form of equity based compensation

Question 25

ESPP

Answer 25

Employee stock purchase plan

Question 26

Statutory stock options

Answer 26

Options granted under an employee stock purchase plan ESPP or an incentive stock option ISO

No taxes are due until the eventual sale of the shares

Maybe subject to alternative minimum tax in the year of exercise

Income is not reported when the option is granted or when it is exercised. Income is only reported once the stock is ultimately sold.

Question 27

Non-statutory stock options

Answer 27

Stock options that are not granted under an employee purchase plan or an ISO plan

Taxpayer recognizes taxable wage income upon the exercise of a non-statutory stock option

Taxable wage income is the difference between the MV of the stock on the exercise date and the option price and will be reflected on the employees form W-2

Question 28

Property transfers incident to divorce

Answer 28

The recipient adjusted basis remains the same as the original owners

Typically, there will be no tax implications for this transfer

Transfer must occur within one year after the date the marriage ends

Even if the transfer was an exchange for cash, the release of marital rights, the assumption of liabilities, or other financial considerations

Question 29

The basis of gifted property

Answer 29

Transferred basis – the basis of gifted property for the Dani is equal to the donors adjusted basis

The holding period of the gift would also transfer to the Donee - in determining short term or long-term

Need to know the donors basis in the property when it was gifted, the fair market value on the date of the gift, and the amount of gift tax. The donor paid on it if any.

Three potential sales scenarios

1. Sell the stock for more than the transferred basis – the transferred basis number is used to calculate the gain
2. Sell the stock for less than the fair market value – the fair market value is used to calculate the loss.
3. Sell the stock for an amount in between the transferred basis and the fair market value - no gain or loss on the transaction is reported

Question 30

The basis of inherited property

Answer 30

The basis of inherited property is the fair market value of the property on the date of the person’s death

Regardless of what the deceased person paid for the property or the adjusted basis

Regardless of how long the beneficiary holds the asset, it is deemed to have been a long-term holding.

Gain and loss is calculated based on the change in value from the date of death

Question 31

“Stepped up” basis

Answer 31

When the property basis were value is higher at the date of death than it was when purchased

Question 32

“Stepped down” basis

Answer 32

When the property basis or value is lower at the date of death than it was when purchased

Ex. House losing value

Question 33

Alternative valuation date

Answer 33

A special rule that allows the personal representative of an estate to elect a different valuation, date of six months after the date of death

The estates value and the related estate tax must be less than they would’ve been on the date of the taxpayers death

If any assets are received from the estate less than six months after the date of death, the basis is the fair market value as of the date the asset was distributed to the heir

Must file the federal estate tax return – form 706, or the basis in the beneficiaries inherited property is the fair market value at the date of death, and the alternative valuation date does not apply