What are the two main types of assets for tax classification?
- Real property
- Personal property
Real property includes land and anything permanently attached to it, such as buildings. Personal property includes all movable assets not classified as real estate, including both tangible items like furniture and intangible assets like stocks.
True or False:
Personal property and personal-use property are the same.
False
Personal property is a legal and accounting term for any movable asset, while personal-use property refers specifically to assets used personally by the taxpayer and not for trade, business, or investment.
What costs are included in the cost basis of an asset?
- Sales taxes charged during purchase
- Freight-in charges and shipping fees
- Installation costs and testing fees
- Delinquent real estate taxes paid by the buyer
- Cost of any major improvements
- Legal and accounting fees for transferring an asset
How does depreciation affect the basis of an asset?
It decreases the basis of an asset over time.
Depreciation allows businesses to recover the cost of assets due to wear and tear, deterioration, or obsolescence. Once fully depreciated, the asset’s basis cannot be further reduced unless it is sold or retired.
What determines whether a gain or loss is long-term or short-term?
The holding period of the asset.
Short-term property is held for one year or less, while long-term property is held for more than one year (at least a year, plus a day).
Fill in the blank:
The basis of real property includes costs such as _______.
- purchase price
- real estate taxes paid by the buyer
- construction expenses
- settlement costs
Settlement costs include abstract fees, utility installation charges, legal fees, recording fees, and transfer taxes.
How is the basis of inherited property determined?
The basis is the fair market value (FMV) of the property on the decedent’s date of death, or on the alternate valuation date if elected by the estate.
How is basis determined when property is received as a gift?
The donee generally takes the donor’s adjusted basis. However:
- If FMV at the time of the gift is less than the donor’s basis, and the donee sells the property at a loss, FMV is used to determine the loss.
- If sold at a gain, the donor’s basis is used.
- If sold between FMV and donor’s basis, no gain or loss is recognized.
How does a taxpayer report property received in exchange for services?
The taxpayer must report the fair market value (FMV) of the property as income in the year the services are performed.
Fill in the blank:
When a taxpayer purchases securities, the basis is usually ______.
The purchase price, plus any additional costs such as broker’s commissions or transaction fees.
What is specific identification in the context of selling securities?
The method where a taxpayer specifies which set of shares to sell to control the holding period and profits/losses.
If the taxpayer does not specify, the shares sold are considered to be from the earliest set purchased, known as First In, First Out (FIFO).
What must a taxpayer determine to report a taxable gain or loss from an asset sale?
- Whether the asset is personal-use or used for business/investment
- The asset’s basis or adjusted basis
- The asset’s holding period (short-term vs long-term)
- The proceeds from the sale
What happens to the basis and holding period when stock dividends are received?
- The original basis is spread over more shares, decreasing the basis per individual share.
- The total basis remains the same.
- The holding period is the same as the original shares.
How does a stock split affect the basis per share?
It decreases the basis per individual share but keeps the total basis of all shares the same.
What is the tax treatment of exercising incentive stock options (ISOs)?
No taxes are due upon exercising ISOs until the eventual sale of the shares, but they may be subject to alternative minimum tax (AMT) in the year of exercise.
What is the basis of property transferred incident to divorce?
The recipient’s adjusted basis remains the same as the original owner’s basis, and typically there are no tax implications.
What determines the basis of gifted property for the donee?
The basis is generally equal to the donor’s adjusted basis, known as a ‘transferred basis’.
What is the alternate valuation date for estate tax purposes?
A date six months after the decedent’s death, which can be elected by the estate’s personal representative for valuing the estate’s assets.
Form 706 must be filed to elect the alternate valuation date and the estate’s value and related tax must be less than they would have been on the date of the taxpayer’s death.
Under what condition can the alternate valuation date be elected?
When the estate’s value and related estate tax are less than they would have been on the date of the taxpayer’s death.
What is the difference between real property and personal property?
- Real property refers to real estate, which includes land and anything permanently attached to it.
- Personal property encompasses all assets not classified as real estate, such as furniture, equipment, vehicles, and intangible assets like stocks and copyrights.
The tax treatment of an asset may differ depending on whether it is intended for personal use, business purposes, or investment.
What is the original basis of an asset?
The original basis of an asset is typically its purchase price but may be calculated based on fair market value if the property is inherited or gifted.
The cost basis of an asset may include sales taxes, freight-in charges, installation costs, delinquent real estate taxes paid by the buyer, major improvements, and legal and accounting fees for transferring an asset.
How is adjusted basis calculated?
Original Cost (or other basis) + Additions (costs of transferring property to a new owner, selling expenses, and substantial improvements) – Deductions (depreciation, section 179 deductions, and casualty/theft losses) = Adjusted Basis
Adjustments to the basis can include costs like extending utility service lines, legal fees for zoning, and capitalized value of a redeemable ground rent.
True or False:
Land can be depreciated for tax purposes.
False
Most tangible assets like buildings, machinery, vehicles, furniture, and equipment can be depreciated, but land cannot.
What should a taxpayer do if they cannot identify a specific set of shares at the time of sale?
If the taxpayer cannot identify a specific set at the time of sale, the shares sold are assumed to be the ones acquired first, known as the FIFO (First In, First Out) method.
Specific identification allows taxpayers to choose which shares to sell, but accurate records must be kept to use this method.
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Essential Tax Law Figures for Individuals43
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Unit 1: Preliminary Work with Taxpayer Data80
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Unit 2: Determining Filing Status and Residency45
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Unit 3: Dependency Relationships33
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Unit 4: Taxable and Nontaxable Income85
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Unit 5: Investment Income and Expenses32
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Unit 6: Calculating the Basis of Assets37
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Unit 7: Capital Gains and Losses45
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Unit 8: Nonrecognition Property Transactions48
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Unit 9: Rental and Royalty Income52
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Unit 10: Other Taxable Income69
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Unit 11: Adjustments to Gross Income51
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Unit 12: Standard Deduction and Itemized Deductions80
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Unit 13: Individual Tax Credits91
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Unit 14: The ACA and the Premium Tax Credit25
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Unit 15: Additional Taxes and Credits40
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Unit 16: Individual Retirement Accounts77
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Unit 17: Foreign Financial Reporting44
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Unit 18: Estate and Gift Taxes for Individuals52
