Determining basis can be confusing whether the transaction is simple or complex. It is easier to determine basis when an asset is first acquired rather than determining basis at the time the asset is sold. Therefore, the purpose of this article is to help you determine the basis in an asset whether it is purchased, inherited or exchanged in order to properly calculate gain or loss on a future disposition.
In order to determine basis, the purchase price is the starting point. However, it’s more than just the purchase price. Acquisition costs such as sales commissions, fees and taxes are added to the purchase price to determine the basis for purchased property.
The basis of inherited property is the fair market value of the property on the date of death of the decedent. Inherited property’s holding period is automatically long-term regardless of the time period that the property was owned by the decedent.
In addition, if the property is owned by spouses and one of the spouses passes away, his or her half of the assets will receive an automatic step up in basis to that of FMV on the date of the death.
The basis of a gift is generally the lesser of the donor’s basis or the FMV of the property on the date of the gift. Both of these values will need to be tracked because depending on whether you dispose of the gifted property at a loss or gain will determine which basis you use to determine how much of that gain or loss will need to be accounted for on a future tax return.
IRC Section 1031 allows you to postpone paying tax on a gain of business or investment property if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
Generally, the new basis is the same as the owner’s basis in the old property given up in the exchange, plus any additional costs incurred, and plus or minus any cash or other property exchanged in regard to the sale.
Section 1031 exchanges can be tricky but beneficial and if you would like more information on these, please contact BCS.