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FreeOCR is a free Optical Character Recognition Software for Windows and supports ... The included Tesseract OCR PDF engine is an open source product ... Downloads · Languages · Online Help

Topic 63: Basis - 201 (1) Gifts FMV for losses or the donor s basis for gains (double basis rule) (2) Inherited assets Fair market value on date of death (3) Assumption of debt Buyer includes any debt assumed in the purchase price in his original basis B Adjusted basis The property s original basis adjusted to the date of disposition equals cost plus capital additions minus capital recoveries C Original issue discount (OID) (1) When a long-term debt instrument is issued at a price lower than its par value, the difference is called OID Investors cannot defer recognition of the interest income represented by the original issue discount OID rules do not apply to short-term debt obligations (maturity dates of one year or less) (2) Interest is reported on Form OID The amount of interest shown is generally accurate for only the original bondholder, because the company that issued the bond does not track its activity in the secondary market D Carryover basis (1) Adjusted basis of purchased property (a) Purchase price plus acquisition costs (if any) plus improvements (b) Factors that would reduce adjusted basis include depreciation (cost recovery deduction), Section 179 expense deduction, and return of capital (c) Acquisition cost includes freight, setup and installation, legal and professional fees associated with the purchase, settlement and recording fees, closing costs, and commissions (2) Adjusted basis if property acquired through an inheritance: Basis equals FMV on date of death or alternative valuation date (six months from date of death), if elected Also referred to as stepped-up basis (3) Adjusted basis of gifting Basis cannot be determined until sale occurs (a) Sales price exceeds both donor s cost and FMV on date of gift; basis equals donor s cost (b) Sales price is less than both donor s cost and FMV on date of gift; basis equals the item that would result in smallest loss (c) Sales price is between donor s cost and FMV on date of gift; basis equals sales price (no gain or loss) (4) Adjusting basis if gift taxes are paid This applies only if the FMV of the property at the date of disposition exceeds the donor s adjusted basis This allows the donee to calculate a new ain basis using: Unrealized appreciation Donor's adjusted basis Gift tax paid FMV Example: Mike gave Martha stock with an FMV of $50,000 and paid gift tax of $11,000 Mike originally acquired the stock for $15,000 What is Martha s basis in the stock $35,000 $11,000 $22,700 basis $50,000 (5) Holding period for gifts (a) For gain basis The holding period starts on the date the donor acquired the property (b) For loss basis The holding period starts on the date of the gift Answer: $15,000.



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202 - Income Tax Planning E Stepped-up basis (1) Assets included in a taxable estate of a decedent receive a stepped-up basis The receivers of the bequests receive a basis in those assets equal to the fair market value at date of the decedent s death or, alternately, six months after the death The step-up in basis is available only for those assets in the taxable estate If assets are kept out of the estate, such as gifts, they will not enjoy the step-up in basis (2) Common law states have a step-up basis for half of the assets; a step-up in basis for the decedent s share of ownership but not for the survivor s share (3) Community property states have a full step-up in basis For tax purposes at death, the new cost basis is the fair market value (FMV) at the date of death for both halves of the community property, even though only one-half is included in the decedent spouse s estate (4) Property owned solely by a decedent generally receives a full step-up basis for the person who acquires it Example: Bart owned stock in XYZ, which he purchased for $1,000 in 1935, until his death in 2003, when it passed on to his son John At Bart s death, the stock was worth $250,000 John kept the stock for six months and sold it for $270,000 John has a realized long-term capital gain of $20,000 between the sale price and the date-of-death value (because it was acquired from the decedent, the holding period for the property is automatically considered long term) (5) For joint tenancy with right of survivorship, two rules are followed in deciding what is included in a decedent s estate and the surviving owner s new basis (a) Husband and wife rule Where the only joint tenants are husband and wife, half of the FMV at the date of death is included in the decedent s estate and the surviving spouse s new basis will equal half the total predeath basis and half the FMV at the date of death (b) Consideration furnished rule Where joint tenants include nonspouses, the decedent s gross estate includes that proportion of the property as the decedent s share of the consideration bears to the total consideration The new basis for each surviving co-owner s interest is his or her old basis plus an increase by the amount included in the decedent s estate split equally among the surviving joint tenants (6) For tenancy in common, the surviving spouse s cost basis at death is the amount included in the deceased spouse s estate If left to a co-owner, the new basis is his or her old basis plus an increase by the amount included in the decedent s estate Example: Lyle, Joel, and Dan purchased property as tenants in common Of the $100,000 purchase price, Lyle aid $50,000 and took a 50 percent interest, Joel paid $30,000 and took a 30 percent interest, and Dan paid $20,000 and took a 20 percent interest Years later when Joel died, the property was worth $250,000 and his estate included $75,000 because he owned a 30 percent interest If Joel left his interest to his widow, Betty, her basis would be $75,000 If he instead left his interest to co-owner Dan, Dan s total basis in the 50 percent interest he would then own would be $95,000 ($75,000 plus his $20,000 contribution) F Impact of community property and common law on basis (1) Community property states provide a decided advantage over common law states in regard to basis adjustments at death.

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