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

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.

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.