Adjusted Basis and Holding Period of Assets Sold

What are the three ways to acquire property?

Purchase, Gift, Inherit.

What determines the gain or loss when selling purchased property?

The basis of the property.

How is gain or loss calculated when selling property?

Sales price - Basis = Gain or Loss.

What happens if the seller incurs a gain when selling property?

The gain is usually taxable.

What can happen if the seller incurs a loss when selling property?

The loss could be deductible.

What constitutes the initial basis of purchased property?

The sum of the cost paid when purchasing the property and the cost spent on capital improvements.

What is the formula for calculating basis?

Basis = Cost + Capital improvements.

What costs are included in the basis of purchased property?

All amounts paid toward the purchase, preparing it for use, and placing it into service, such as shipping costs, installation costs, sales taxes, and testing costs.

What are the two types of purchased property?

Real Property (land and items permanently affixed) and Personal Property (all property not classified as real property).

How do you calculate the basis of equipment purchased for a business?

Basis = Cost + Shipping Cost + Installation fee.

What is the holding period for property?

It begins on the date the property is acquired (purchase date).

What is considered long-term property?

Property owned for more than a year.

What tax applies to gains from long-term property sales?

Capital gain tax.

What is considered short-term property?

Property owned for one year or less.

What tax applies to gains from short-term property sales?

Gains are taxed at the ordinary income tax rate.

What is the adjusted basis of an asset?

The basis adjusted downward by accumulated depreciation, also known as Net Book Value (NBV).

What is depreciation expense?

A tax-deductible expense for certain property, usually property used in business.

How do you calculate the adjusted basis of a milling machine after two years of depreciation?

Initial basis of $10,000 minus $1,000 depreciation for Year 1 and Year 2 results in an adjusted basis of $8,000.

What is Fair Market Value (FMV) in the context of property received for services?

The value of the property received, such as a car, which is subject to tax.

Do individuals need to pay tax on property received for services?

Yes, they must pay tax on the Fair Market Value of the property received.

What is the tax implication of receiving property instead of cash for services?

Tax is paid on the FMV of the property received.

What is the basis for taxable transactions?

Fair Market Value (FMV)

What basis is used for nontaxable transactions?

Net Book Value (NBV)

What happens to taxable income in a nontaxable transaction such as a like-kind exchange?

No taxable income is recognized by either party.

What is the rule for basis spreading adjustments in nontaxable stock dividends?

The basis of the original shares is spread over both the original and new shares, resulting in a lower basis per share.

How do you calculate the new basis per share after a nontaxable stock dividend?

Divide the total basis by the total number of shares after the dividend.

What is the initial basis per share if a person buys 200 shares for $20,000?

$100 per share.

What is the new basis per share after a 10% nontaxable stock dividend on 200 shares?

$90.91 per share.

Who is referred to as the donor in the context of gifted property?

The person who makes a gift.

Who is referred to as the donee in the context of gifted property?

The person who receives the gift.

What are the three key areas tested regarding gifted property?

Donee's tax basis, depreciation basis, and holding period of the gifted property.

Does a donee have to pay gift tax?

No, never.

Does a donor have to pay gift tax?

Possibly, depending on the size of the gift.

What is the general rule for the donee's tax basis in gifted property?

The donor's basis becomes the donee's basis.

What is the rollover cost basis for gifted property?

Net Book Value (NBV) of the donor.

How is gain or loss calculated when the gifted property is sold?

Sales Price - Basis = Gain or Loss.

What happens when the FMV at the date of the gift is less than the donor's NBV?

The donee's basis depends on the future sales price of the asset.

What is the first scenario under the exception to the general rule for donee's basis?

If the sales price is greater than the NBV, use the NBV as the basis and recognize a gain.

In the first scenario, how is gain calculated if the sales price is $6,500 and the NBV is $5,000?

Gain = Sales price - NBV = $6,500 - $5,000 = $1,500.

What is the adjusted basis of non-depreciable property given as a gift worth $3,000?

$5,000.

What is the outcome if the sales price of gifted property is less than the donor's NBV?

The donee's basis will depend on the sales price when the property is sold.

What is the significance of the holding period for gifted property?

It affects the tax treatment when the property is eventually sold.

What is the impact of a nontaxable stock dividend on the total basis of shares?

The total basis remains the same, but the basis per share decreases.

What is the formula to determine gain or loss when selling gifted property?

Sales Price - Basis = Gain or Loss.

What is the tax basis used when the sales price is greater than the donor's net basis value (NBV)?

Use the donor's NBV as the basis and recognize the gain.

In Scenario 1, what is the gain recognized when a taxpayer sells gifted property for $6,500 with a donor's basis of $5,000?

The gain recognized is $1,500.

What is the tax basis used when the sales price is less than the fair market value (FMV) of the gifted property?

Use the FMV as the basis and recognize a loss.

In Scenario 2, what loss is recognized when a taxpayer sells gifted property for $1,000 with an FMV of $3,000?

The loss recognized is $2,000.

What is the tax basis used when the sales price is between the NBV and FMV of the gifted property?

Use the sales price as the basis, and no gain or loss is recognized.

In Scenario 3, what happens when a taxpayer sells gifted property for $3,500, which is between the NBV and FMV?

The taxpayer will not recognize any gain or loss.

What is the basis for depreciation of gifted property?

The basis for depreciation is the lesser of the donor's adjusted basis or the FMV at the date of the gift.

In the example provided, what is the depreciable basis when the donor's adjusted basis is $5,000 and the FMV is $3,000?

The depreciable basis is $3,000.

What tax rates apply to long-term property sold for a gain?

Long-term property is taxed at capital gain rates.

What tax rates apply to short-term property sold for a gain?

Short-term property is taxed at ordinary income tax rates.

What is the general rule regarding the holding period for gifted property?

The recipient of a gift absorbs the donor's holding period.

What is the exception to the general rule for holding periods of gifted property?

If the property is sold for a gain, the recipient pays tax at capital gain rates.

What is the relationship between the sales price and FMV in Scenario 2?

The sales price is less than the FMV.

What is the calculation for loss in Scenario 2?

Loss = Sales price - FMV.

What is the calculation for gain in Scenario 1?

Gain = Sales price - NBV.

What is the significance of the donor's adjusted basis in determining the basis for depreciation?

It is compared to the FMV at the date of the gift to determine the lesser value.

What is the outcome if the FMV at the date of the gift is less than the donor's NBV?

It creates exceptions for determining the donee's tax basis.

What happens if the sales price equals the FMV?

No gain or loss is recognized.

What is the adjusted basis of the property in the examples provided?

The adjusted basis is $5,000.

What is the fair market value of the property in the examples?

The fair market value is $3,000.

What is the impact of the holding period on the taxation of gifted property?

It determines whether the gain is taxed at capital gain rates or ordinary income tax rates.

What is the implication of a loss being recognized in the context of gifted property?

The loss is calculated based on the FMV and sales price.

What happens to the holding period when a donee sells gifted property at a price higher than the NBV?

The donee will use the donor's holding period.

What is the holding period for gifted property when the sales price is less than the FMV?

The holding period begins at the date of the gift, and the donee cannot claim the donor's holding period.

What occurs when the sales price of gifted property is between the NBV and FMV?

The holding period is not relevant, no gain or loss is recognized, and no tax ramifications occur.

What is the general rule for the basis of inherited property?

The basis is the Fair Market Value (FMV) of the property at the date of death.

What advantage does a stepped-up basis provide for taxpayers inheriting property?

Using the higher FMV results in a higher basis, which can lead to less gain recognized and lower taxes.

What is the formula for calculating gain or loss on inherited property?

Gain or loss = Sales price of the asset - Basis.

What is the Alternate Valuation Date (AVD) in the context of inherited property?

If elected, the FMV on the alternate valuation date may be used to value estate property, based on the earlier of the distribution date or six months after death.

How is inherited property classified in terms of holding period?

Inherited property is automatically considered to be long-term property regardless of how long it has been held.

In the example provided, what was the sales price of the inherited property?

The sales price was $55,000.

What was the FMV of the inherited property at the date of death in the example?

The FMV was $60,000.

What was the cost basis of the inherited property in the example?

The cost basis was $20,000.

How is the gain or loss calculated for gifted property in the example?

Property gain/loss = Sales price - NBV, which equals $55,000 - $20,000 = $35,000 gain.

What loss was recognized when the inherited property was sold?

A $5,000 loss was recognized, calculated as $55,000 (sales price) - $60,000 (FMV).

What is the tax implication of the difference between NBV and FMV in the example?

The difference of $40,000 between NBV and FMV will not be taxed.

What is the basis of inherited property according to the general rule?

Inherited property generally takes a stepped-up basis to the FMV at the date of the decedent's death.

What does the IRS allow regarding the basis for inheritances?

The IRS allows the use of FMV (higher basis) instead of NBV (lower basis) to minimize tax on inheritances.

What is the significance of the holding period for gifted property when the sales price is less than FMV?

The donee cannot claim the donor's holding period, and the holding period starts at the date of the gift.

What is the result when the sales price of inherited property is lower than the FMV?

A loss is recognized based on the difference between the sales price and the FMV.

What is the implication of the holding period for gifted property when the sales price is between NBV and FMV?

No gain or loss is recognized, and the holding period is not relevant.

What happens to the basis of inherited property when it is sold?

The basis is the FMV at the date of death, which is used to determine gain or loss upon sale.

What is the effect of a higher basis on tax liability for inherited property?

A higher basis results in less gain recognized and potentially lower tax liability.

What is the relationship between the sales price and the basis for determining gain or loss on inherited property?

The gain or loss is determined by subtracting the basis from the sales price.

What is the outcome if a taxpayer inherits property with a FMV of $20,000?

The basis of the inherited property will be the FMV of $20,000 at the date of death.

What is the fair market value (FMV) at death for inherited property in the example?

$20,000

What is the FMV after six months for the inherited property?

$15,000

What is the FMV after eight months for the inherited property?

$22,000 (inapplicable for basis calculation)

What is the net basis (NBV) of the inherited property?

$5,000

What is the basis of inherited property if the alternate valuation date was not elected?

$20,000 (FMV at date of death)

What is the basis of inherited property if the alternate valuation date was elected?

$15,000 (FMV at the earlier of six months after death or date of distribution)

If the taxpayer sells the inherited property for $25,000 and the alternate valuation date is not elected, what is the capital gain?

$5,000 gain ($25,000 - $20,000)

If the taxpayer sells the inherited property for $25,000 and the alternate valuation date is elected, what is the capital gain?

$10,000 gain ($25,000 - $15,000)

What is the general rule for capitalizing property purchased for a business?

If the useful life is greater than one year, capitalize the cost.

What qualifies as an improvement that must be capitalized?

An expenditure that results in betterment, extends useful life, restores value, or adapts to a new use.

What are the characteristics of expenses related to repairs and maintenance?

Costs to maintain property in working condition that do not add significant value or extend life are expensed immediately.