Unit 6: Calculating the Basis of Assets Flashcards
Real property includes
land and anything permanently attached to it
What is the initial basis of an asset?
its cost
What is an adjusted basis of an asset?
the basis increased or decreased by certain items
What is depreciation?
an income tax deduction that allows a business to recover the cost or basis of property used in the business over time
Depreciation __ the basis of an asset
decreases
When does an asset’s holding period start and end?
it begins on the day AFTER it is purchased or acquired and ends on the day of its sale or disposition
In order to correctly report a taxable gain or loss related to the disposition of an asset, a taxpayer needs to identify:
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
Demolition costs and other costs related to the preparation of land prior to construction must be:
added to the basis of the land
Settlement costs do not include:
amounts placed in escrow for future payment of items such as taxes and insurance
When a taxpayer sells securities, his investment broker should provide Form ____by _____ following the end of the tax year
1099-B, Proceeds from Broker and Barter Exchange Transactions; February 15
When directing a broker to sell stock, a taxpayer may specify which block or part of a block, to sell; this is called
specific identification
If a taxpayer cannot identify a specific block at the time of sale, shares sold are treated as ____; this method is called ____
coming from the earliest block purchased; FIFO
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?
Shares = 100 + 10 = 110
Basis per share = $1,100 / 110 = $10 per share
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?
$5,000 / 200 shares = $25
If a taxpayer cannot provide evidence of his basis in an asset sold, the IRS may deem the basis to be:
zero
What are statutory stock options?
These are options granted under an employee stock purchase plan (ESPP) or an incentive stock option (ISO)
What is the tax advantage of statutory stock options?
income is not reported when it is granted or exercised. Income is only reported when it is ultimately sold
How are the stock options taxed when the employee eventually sells the stock they bought by exercising the option?
they are taxed at capital gains or loss
If a taxpayer does not meet special holding period requirements, the taxpayer will have to treat income from the sale of the stock as:
ordinary income
What form is received after exercising an ISO?
Form 3921, Exercise of an Incentive Stock Option
After the employee sells stock acquired by exercising an option granted under an employee stock purchase plan, the employee will receive:
Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan
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.
FMV; agreed-upon cost
What is the property’s basis after casualty loss?
the basis is increased by the amount spent on repairs that restore the property to its pre-casualty condition
If you buy a property and assume an existing mortgage on it what is the basis on the property?
the amount paid plus amount owed on the mortgage, settlement fees, and closing costs
What is the basis of the property transferred by a spouse (or former spouse if the transfer is due to divorce)?
the same as the spouse’s adjusted basis
For transfers related to a divorce, the transfer generally must occur within ___ after the date of the marriage ends.
one year
The basis of gifted property
the donor’s adjusted or transferred basis
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)
adjusted basis; the FMV; gift tax
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?
The transferred basis
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?
the FMV on the date of the gift
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
greater; less
What is the basis of inherited property?
the FMV of the property on the date of the decedent’s death
If an inherited property is sold by the beneficiary, the gain will be calculated based on:
the change in value from the date of decedent’s death
What is the alternate valuation date?
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
How do you elect the alternate valuation date?
the estate’s value and related estate tax must be less than they would have been on the date of the taxpayer’s death.
If the alternate valuation date has been elected for the estate, the basis of inherited assets is normally
the FMV of the assets six months after the date of death.
If a federal estate tax return is not filed for the deceased taxpayer, the basis of the beneficiary’s inherited property is
the FMV at the date of death
