CFP - Income Tax Planning: Calculating Basis (Lecture & Quiz)

Gifted Property Exemption #1 (Loss Property)

if at date of gift FMV < donor's basis; use double basis - sales price > donor's basis then donee's basis = donor's basis - sales price < FMV then donee's basis = FMV at date of gift - donor's basis > sales price > FMV then donee's basis = sales price - holding period: - at loss, donee's HP starts at date of gift - at gain, carryover HP

Deathbed Gifts

prop inherited by taxpayer (or spouse) which was both appreciated & gifted by same taxpayer to decedent within 1yr of decedent's death beneficiary's basis in prop is carryover of decedent's basis (not date of death FMV)

Inherited Property

- basis is the FMV at date of death or AVD, if properly elected by executor - holding period is always long-term

Gifted Property

- carryover basis, donee's basis in the property is the same as the donor's basis in the property - there are two exemptions

Cost Basis

- purchase price - FMV of any property given in taxable exchange - sales tax - freight - installation - testing

C. $100,000

A client sold an apartment building last year for $100,000, paying a sales commission of $5,000 plus $2,500 closing costs. The building originally cost $80,000 20 years ago. Total straight line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 which was assumed by the buyer. What is the purchaser's cost basis? A. $70,000 B. $92,500 C. $100,000 D. $107,500 E. $160,000

C. $40,000

A client sold an apartment building last year for $100,000, paying a sales commission of $5,000 plus $2,500 closing costs. The building originally cost $80,000 20 years ago. Total straight line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 which was assumed by the buyer. What is the seller's adjusted cost basis prior to the sale? A. $32,500 B. $37,500 C. $40,000 D. $42,500

C. $75,000. (original cost basis is increased by her share of the profits)

Abigail was an original investor in, and owns a 25% interest in, Decorate Your Dream LLC, a home decorating company. Abigail paid $50,000 for her interest. This year, Decorate Your Dream did very well and had a profit of $100,000. However, no distributions were made. What is Abigail's basis in her interest in Decorate Your Dream at the end of this year? A. $25,000. B. $50,000. C. $75,000. D. $100,000.

D. $150,000 (upon the death of either spouse in a CP state, both halves of CP are stepped to the FMV)

Bonnie and Manuel are married. He paid $100,000 for their home five years ago. Its fair market value was $150,000 when Manuel died. What is Bonnie's basis in the home after Manuel's death if the home was held as community property and Manuel left his half to Bonnie? A. $50,000 B. $75,000 C. $125,000 D. $150,000

D. $766,000

Chuck purchases land for $250,000. He incurs legal fees of $1,000 associated with the purchase. He subsequently incurs additional legal fees of $15,000 having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $500,000. What is Chuck's basis for the land and the improvements? A. $250,000 B. $750,000 C. $765,000 D. $766,000

D. $34,000

Sam's Turbo Repair, Inc. (STR) purchased a new machine for cleaning and retooling the turbo blades on semi-trucks. The machine cost was $30,000, there was 10% sales tax, and $1,000 delivery and setup fee. What is STR's basis in the new machine? A. $30,000 B. $31,000 C. $33,000 D. $34,000

C. The adjusted basis for Tony is $20,660.

Tony Scarponi has come to you asking about the basis of property that his brother Calvin gave to him. The property had a market value of $75,000 and Calvin's adjusted basis in the property was $18,000 at the time of the gift. Calvin paid gift tax of $3,500 on the gift. Tony wants to know what his adjusted basis in the property is. Assume Calvin had utilized his annual gift tax exclusion for gifts previously given to Tony that year. What will you tell him? A. Tony's new basis is $18,000, the same as Calvin's basis was at the time the gift was made. B. Tony's new basis is the fair market value of the gift at the time of the gift. C. The adjusted basis for Tony is $20,660. D. The adjusted basis for Tony is $21,500.

Gifted Property Exemption #2 (Appreciated property w/ Gift Tax Paid)

= donor's basis + (net appreciation in gift/taxable gift) x gift tax paid - holding period: carryover

C. $201,000

Arthur purchased a home for $175,000. Over the years, Arthur has made the following repairs and improvements: Room addition = $20,000 Pool = $6,000 Roof repair = $3,500 Painting = $2,000 Two years ago, a storm caused damage to the roof. Arthur decided to repair rather than replace the roof. Approximately six months prior to selling the home this year, Arthur had the house painted. What was the basis of the home when Arthur sold it in this past year? A. $206,500 B. $204,500 C. $201,000 D. $195,000

C. If David subsequently sells the stock to an unrelated party for $2,200, he will have no gain or loss.

Donna sells stock in Martin Corporation to her brother David for $1,800. Donna purchased the stock four years ago for $3,000 and the current fair market value of the stock is $1,800. David paid Donna $1,800 for the stock. Which of the following statements is correct regarding the tax consequences of this transaction? A. If David subsequently sells the stock to an unrelated party for $3,500, he will realize a gain of $1,700. B. Donna has a recognized loss of $1,200. C. If David subsequently sells the stock to an unrelated party for $2,200, he will have no gain or loss. D. If David subsequently sells the stock to an unrelated party for $3,500, he will have no gain or loss.

D. $13,400.

Drew recently purchased a new machine for his business. The price of the machine was $12,000. Drew also paid $100 in sales tax, $300 in freight, and $1,000 in installation and testing costs. What is Drew's basis in the new machine? A. $12,100. B. $12,400. C. $13,000. D. $13,400.

A. If Barnum subsequently sells the shares of Circus Clowns, Inc. for $4,750, the basis used to calculate his gain or loss will be $4,000.

Five years ago, Bailey purchased 200 shares of Circus Clowns, Inc. for $4,000. Bailey recently gifted those shares of stock to his son Barnum. He paid gift tax of $700. The value of the 200 shares of stock on the date of the gift was $2,000. Which of the following statements is correct? A. If Barnum subsequently sells the shares of Circus Clowns, Inc. for $4,750, the basis used to calculate his gain or loss will be $4,000. B. If Barnum subsequently sells the shares of Circus Clowns, Inc. for $4,750, the basis used to calculate his gain or loss will be $1,000. C. If Barnum subsequently sells the shares of Circus Clowns, Inc. for $1,600, the basis used to calculate his gain or loss will be $4,000. D. If Barnum subsequently sells the shares of Circus Clowns, Inc. for $1,600, he will not have any gain or loss.

I, II, and III.

Michael purchased a mutual fund with $25,000 five years ago. During the four years, $6,000 in dividends and capital gains were reinvested in the fund. Today, the fund is valued at $40,000. If Michael sells shares equal to $25,000, which statement(s) is/are correct? I. The taxable gain can be based on an average cost per share. II. The client can choose which shares to sell, thereby controlling the taxable gain. III. To minimize the taxable gain today, the client would sell shares with the higher cost basis. IV. The client will NOT have a gain as long as he or she sells less than what he or she invested.

B. Neither Jason nor Aaron has a recognized gain or loss in either year.

On February 12 of last year, Jason gifted stock in Retro Corp to his brother Aaron. Jason's basis in Retro's stock was $12,000 and it had a $9,000 fair market value on the date it was gifted. On August 31 of the following year, Aaron sold the Retro stock to Amy (an unrelated party) for $10,000. What is the tax treatment of these transactions to Aaron and/or Jason? A. Jason recognized a loss of $3,000 last year and Aaron recognized a gain of $1,000 in the following year. B. Neither Jason nor Aaron has a recognized gain or loss in either year. C. Aaron had a recognized gain of $1,000 in the following year. D. Jason had a recognized loss of $3,000 last year.

C. Either the date the property was acquired by the donor or the date of the gift.

The holding period of property acquired by gift may begin on: A. The date the property was acquired by the donor only. B. The date of gift only. C. Either the date the property was acquired by the donor or the date of the gift. D. Some other date.

Capital Recoveries

amount of basis recovered through: - depreciation or cost recovery allowances - casualty & theft losses - certain corporate distributions - amortizable bond premium

Capital Additions

cost of improvements & betterments to the property that are capital in nature and not currently deductible