Unit 6: Calculating the Basis of Assets

Question 1

Real property includes

Answer 1

land and anything permanently attached to it

Question 2

What is the initial basis of an asset?

Answer 2

its cost

Question 3

What is an adjusted basis of an asset?

Answer 3

the basis increased or decreased by certain items

Question 4

What is depreciation?

Answer 4

an income tax deduction that allows a business to recover the cost or basis of property used in the business over time

Question 5

Depreciation __ the basis of an asset

Answer 5

decreases

Question 6

When does an asset’s holding period start and end?

Answer 6

it begins on the day AFTER it is purchased or acquired and ends on the day of its sale or disposition

Question 7

In order to correctly report a taxable gain or loss related to the disposition of an asset, a taxpayer needs to identify:

Answer 7

whether the asset is personal-use or used for business or investment;

the asset’s basis or adjusted basis

the holding period

the proceeds from the sale

Question 8

Demolition costs and other costs related to the preparation of land prior to construction must be:

Answer 8

added to the basis of the land

Question 9

Settlement costs do not include:

Answer 9

amounts placed in escrow for future payment of items such as taxes and insurance

Question 10

When a taxpayer sells securities, his investment broker should provide Form ____by _____ following the end of the tax year

Answer 10

1099-B, Proceeds from Broker and Barter Exchange Transactions; February 15

Question 11

When directing a broker to sell stock, a taxpayer may specify which block or part of a block, to sell; this is called

Answer 11

specific identification

Question 12

If a taxpayer cannot identify a specific block at the time of sale, shares sold are treated as ____; this method is called ____

Answer 12

coming from the earliest block purchased; FIFO

Question 13

You pay $1050 for 100 shares of stock plus commission of $50. Your basis is $1,100 or $11 per share ($1100/100). You receive 10 additional shares from a stock dividend. What is your new per share basis?

Answer 13

Shares = 100 + 10 = 110

Basis per share = $1,100 / 110 = $10 per share

Question 14

You buy 100 shares for $50. Your overall basis is $5,000. They declare a 2 for 1 stock split and you receive 100 additional shares. What is your individual basis per share on the stock?

Answer 14

$5,000 / 200 shares = $25

Question 15

If a taxpayer cannot provide evidence of his basis in an asset sold, the IRS may deem the basis to be:

Answer 15

zero

Question 16

What are statutory stock options?

Answer 16

These are options granted under an employee stock purchase plan (ESPP) or an incentive stock option (ISO)

Question 17

What is the tax advantage of statutory stock options?

Answer 17

income is not reported when it is granted or exercised. Income is only reported when it is ultimately sold

Question 18

How are the stock options taxed when the employee eventually sells the stock they bought by exercising the option?

Answer 18

they are taxed at capital gains or loss

Question 19

If a taxpayer does not meet special holding period requirements, the taxpayer will have to treat income from the sale of the stock as:

Answer 19

ordinary income

Question 20

What form is received after exercising an ISO?

Answer 20

Form 3921, Exercise of an Incentive Stock Option

Question 21

After the employee sells stock acquired by exercising an option granted under an employee stock purchase plan, the employee will receive:

Answer 21

Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan

Question 22

If you receive property in exchange for services, you must include the property’s ___ in income. If two people agree on a cost for services beforehand, the ___ may be used to establish the amount included as income as the asset’s basis.

Answer 22

FMV; agreed-upon cost

Question 23

What is the property’s basis after casualty loss?

Answer 23

the basis is increased by the amount spent on repairs that restore the property to its pre-casualty condition

Question 24

If you buy a property and assume an existing mortgage on it what is the basis on the property?

Answer 24

the amount paid plus amount owed on the mortgage, settlement fees, and closing costs

Question 25

What is the basis of the property transferred by a spouse (or former spouse if the transfer is due to divorce)?

Answer 25

the same as the spouse’s adjusted basis

Question 26

For transfers related to a divorce, the transfer generally must occur within ___ after the date of the marriage ends.

Answer 26

one year

Question 27

The basis of gifted property

Answer 27

the donor’s adjusted or transferred basis

Question 28

The taxpayer must know the donor’s ___ when it was gifted, its ___ on the date of the gift, and the amount of ___the donor paid on it (if any)

Answer 28

adjusted basis; the FMV; gift tax

Question 29

What is the donee’s basis for determining a gain if he sells the gifted property and the FMV is less than the transferred basis?

Answer 29

The transferred basis

Question 30

What is the donee’s basis for determining a loss if the FMV of the property on the date of the gift is less than the transferred basis on the date of the gift?

Answer 30

the FMV on the date of the gift

Question 31

The sale of gifted property can result in no gain or loss. This happens when the sale proceeds are ___ than the gift’s FMV but ___ than the transferred basis in situations where the FMV of the property on the date of the gift is less than the transferred basis

Answer 31

greater; less

Question 32

What is the basis of inherited property?

Answer 32

the FMV of the property on the date of the decedent’s death

Question 33

If an inherited property is sold by the beneficiary, the gain will be calculated based on:

Answer 33

the change in value from the date of decedent’s death

Question 34

What is the alternate valuation date?

Answer 34

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

Question 35

How do you elect the alternate valuation date?

Answer 35

the estate’s value and related estate tax must be less than they would have been on the date of the taxpayer’s death.

Question 36

If the alternate valuation date has been elected for the estate, the basis of inherited assets is normally

Answer 36

the FMV of the assets six months after the date of death.

Question 37

If a federal estate tax return is not filed for the deceased taxpayer, the basis of the beneficiary’s inherited property is

Answer 37

the FMV at the date of death