Basis Calculations
Basis is the amount of a taxpayer's investment in an asset for tax purposes, used to determine gain or loss on disposition and depreciation deductions.
Explanation
Cost basis is the starting point for purchased assets. Gifted property takes the donor's carryover basis (with a special rule for losses when FMV < basis at gift date). Inherited property receives a stepped-up basis to fair market value at the date of death. For pass-through entities, a partner's or shareholder's outside basis adjusts annually for contributions, income, losses, and distributions. Adjusted basis equals original basis plus improvements and other additions, minus depreciation and other reductions.
Key Points
- •Purchased assets: cost basis; gifts: carryover basis; inherited property: stepped-up to FMV
- •Adjusted basis = original basis + improvements − depreciation
- •Pass-through entity basis adjusts for income, losses, contributions, and distributions
Exam Tip
For gifted property where FMV < donor basis at the gift date, use FMV for computing losses and donor basis for computing gains — if selling price is between, no gain or loss.
Frequently Asked Questions
Related Topics
Property Transactions
Property transactions encompass the tax rules for gains and losses from the sale, exchange, or disposition of assets, including characterization as ordinary, capital, or Section 1231.
Partnership Taxation
Partnerships are pass-through entities that file Form 1065 and allocate income, deductions, gains, losses, and credits to partners via Schedule K-1.
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