CPA Prep REG

REG Chapter 10 Part 1: Basis and Holding Period of Assets

All about that basis

Got another great lesson for you – this chapter will discuss the tax implications of acquiring and disposing of assets. The first part will cover the basis and holding periods of assets. Here are today’s learning outcomes:

  • Calculate the tax basis of an asset.
  • Determine the holding period of a disposed asset for classification of tax gain or loss.

Gain/Loss Calculation

The basic formula for calculating gain or loss on the sale of an asset is: proceeds – adjusted basis = gain or (loss).

Calculating Basis

The adjusted basis is equal to:

  • The original cost of the asset
  • Plus any additional acquisition cost (sales tax, installation, shipping cost or any other cost to acquire or setup the asset for its intended use).
  • Plus capital improvements (excluding small reoccurring repairs).
    • New roof on a home (not paint on the interior)
    • New engine on a vehicle (not new tires)
  • Less depreciation, amortization or depletion.

EXAMPLE: Bob purchased a new industrial printer for his office. The total invoice for the printer was $5,960.25: $5,000 for the printer, $400 for sales tax and $560.25 for shipping and handling cost. When the printer arrived there was an additional $500 cost to install the printer and get it up and running. In addition to this cost, Bob bought ink cartridges and paper for $200. The moving guys also scratched the side of the of the printer and it cost $50 to buff the scratch out. What is the cost basis?

ANSWER: $6,460.25 – $5,000 printer + $400 sales tax + $560.25 shipping and handling cost + $500 installation cost. The small repair to buff out the scratch, the paper, and the ink would not be added to the basis of the asset.

Basis in Gifted Property

Gain – If the donor of a gift would have realized a gain if they sold the property instead of gifting the property then the donee’s basis is the donor’s basis at the date the gift was made. That’s a lot to take in but it’s really simple when you look at an example:

EXAMPLE: Bob’s adjusted basis in his vintage car is $5,000. The car has a fair market value of $25,000 at the time Bob gave it to his son Bill. Bill’s adjusted basis in the vehicle is $5,000 – the same as his dad’s adjusted basis at the time the gift was made.

Loss – If the donor would have realized a loss then the donee’s basis is the fair market value.

EXAMPLE: Bob has stocks that he bought several years ago for $10,000. The stocks are now worth $5,000 and he decides to gift them to his son Bill. Bill’s adjusted basis will be the $5,000 and not the $10,000.

General Rule: The donee’s basis will be the lower of the fair market value or the adjusted basis of the donor.

Basis in Inherited Property

The basis of property acquired through inheritance is the fair market value at the date of death.

Note: There is an alternative valuation which allows for the basis to be the fair market value 6 months after the date of death if an election is made.

Holding Period

The tax treatment of the sale of an asset depends on the holding period of the asset. The two main categories are short-term and long-term capital gains.

Short Term Capital Gain/Loss – One year or less holding period

Long Term Capital Gain/Loss – More than one year (1 year and 1 day).

Gift – The holding period of the donee is the same as the holding period of the donor.

  • Joe bought a stock and then subsequently gifted the stock to his daughter. His daughter sells the stock the next day. This would be considered a short-term capital gain or loss.

Inheritance – The holding period is automatically long-term.

Key Takeaways

  • Know the difference between long-term and short-term capital gains.
  • Know the treatment of property acquired through inheritance vs. property acquired through gift.
  • Know how to calculate the basis of property. Know what increases and what decreases basis.

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