Unit 6 - Calculating The Basis Of Assets Flashcards
Assets - taxing and types
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
Assets – real property
Refers to real estate, which includes and anything permanently attached to it
Buildings
Farmland
Residential homes
Commercial properties
Rental properties
Subsurface mineral rights
Assets – personal property
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
Personal property vs personal use
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
Basis of an asset
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
The cost basis of an asset may include:
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
Basis of an asset – post acquisition cost
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
Depreciation
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
Depreciation – residential rental property
Most residential rental property is depreciated over 27.5 years
Only the value of the building can be depreciated, never the land
Adjusted basis
Includes the original basis plus any increases or decreases such as
Subsequent improvements
Depreciation deductions
Casualty losses
Rebates
Insurance reimbursements
Asset holding period
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
Accurately reporting any taxable gain or loss from the sale of disposal of an asset you must identify
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
Basis of real property - real estate
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
Basis, other than cost
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
Property in exchange for services
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
Basis after casualty loss
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
Basis after mortgage assumption
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
1099 – B
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
Stock dividends
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
Stock split
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
Basis of securities
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
- Statutory stock options.
- Non-statutory stock options.
Stock options
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
ISO’s
Incentive stock options
Companies offer stock options to their employees as a form of equity based compensation
ESPP
Employee stock purchase plan
Statutory stock options
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.
Non-statutory stock options
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
Property transfers incident to divorce
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
The basis of gifted property
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
- Sell the stock for more than the transferred basis – the transferred basis number is used to calculate the gain
- Sell the stock for less than the fair market value – the fair market value is used to calculate the loss.
- 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
The basis of inherited property
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
“Stepped up” basis
When the property basis were value is higher at the date of death than it was when purchased
“Stepped down” basis
When the property basis or value is lower at the date of death than it was when purchased
Ex. House losing value
Alternative valuation date
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
