Basis

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					Determination of Gain or Loss

A.   Realized Gain or Loss--the amount of realized gain or loss is the excess
     of the amount realized from the sale or other disposition of property over
     the adjusted basis of the property
     1. Sale or Other Disposition--any transaction in which a taxpayer
         realizes benefit in exchange for property
         a. Sale--the following transactions are examples of sales or other
             dispositions
             1) Sale
             2) Exchange
             3) Foreclosure
             4) Abandonment
         b. Not Sale--the following transactions are not sales or other
             dispositions
             1) Gift
             2) Bequest
             3) Exercise of Convertible Securities
             4) Marital Settlement
             5) Demolition
     2. Amount Realized--the amount realized from the sale or other
         disposition of property is equal to the fair market value of any
         property received in the transaction increased by any liabilities
         assumed by the transferee and by any liabilities to which any property
         transferred is subject and reduced by any liabilities assumed by the
         transferor and by any liabilities to which any property received is
         subject and by any costs of transferring the property such as
         advertising, appraisal fees, sales commissions, legal fees, transfer
         taxes, recording fees, etc.
         a. Illustrations
             1) An individual sold land with a fair market value of $50,000
                 and an adjusted basis of $30,000 and subject to a $5,000
                 liability for $45,000; the purchaser assumed the liability on
                 the land
                     Gain = (45,000 + 5,000) - 30,000 = 20,000

             2)   An individual sold land with a fair market value of $50,000
                  and an adjusted basis of $30,000 and subject to a $5,000
                  liability for $25,000 in cash and stock with a fair market
                  value of $28,000 and an adjusted basis of $17,000 and subject
                  to an $8,000 liability; he assumed the liability on the stock;
                  the purchaser assumed the liability on the land
                      Land:
                          Gain = (25,000 + 28,000 + 5,000 - 8,000) = 50,000 –
                                 30,000 = 20,000




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                  Stock:
                      Gain = 50,000 + 8,000 – 5,000 = 53,000 – 25,000 =
                             28,000 – 17,000 = 11,000

3.   Adjusted Basis--the adjusted basis of property is equal to the cost or
     other original basis of the property increased by capital additions
     and reduced by capital recoveries
     a. Cost Basis--the cost basis of property is equal to the fair market
         value of any property given in the transaction increased by any
         liabilities assumed by the transferree and by any liabilities to
         which any property received is subject and by any costs of
         acquiring the property such as commissions, legal fees, recording
         fees, title insurance, appraisals, sales taxes, transfer taxes,
         etc. and reduced by any liabilities assumed by the transferor and
         by any liabilities to which any property transferred is subject
         1) Illustrations
             a) An individual purchased land with a fair market value of
                 $50,000 and an adjusted basis of $30,000 and subject to a
                 $5,000 liability for $45,000; he assumed the liability on
                 the land
                     Basis = 45,000 + 5,000 = 50,000

             b)   An individual purchased land with a fair market value of
                  $50,000 and an adjusted basis of $30,000 and subject to a
                  $5,000 liability for $25,000 in cash and stock with a fair
                  market value of $28,000 and an adjusted basis of $17,000
                  and subject to an $8,000
                  liability; he assumed the liability on the land; the
                  seller assumed the liability on the stock
                      Stock:
                          Basis = 50,000 + 8,000 – 5,000 = 53,000 – 25,000
                                = 28,000

                      Land:
                          Basis = 25,000 + 28,000 + 5,000 - 8,000 = 50,000

     b.   Capital Additions--capital additions are adjustments that increase
          the adjusted basis of property
          1) Improvements--the cost of improvements to property increases
              the adjusted basis of the property
          2) Discount Amortization--amortization of a discount on a debt
              obligation increases the adjusted basis of the debt obligation
     c.   Capital Recoveries--capital recoveries are adjustments that reduce
          the adjusted basis of property
          1) Depreciation--the depreciation actually taken or the
              depreciation allowable under the straight-line method if no
              depreciation is taken reduces the adjusted basis of the


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                  property
                  a) Illustration--an individual sold a computer which he
                      purchased during year 1 for $10,000 and was used in his
                      business for $5,500 during year 4 he elected to use the
                      straight-line option under ACRS
                           Gain = 5,500 - (10,000 - 1,000 - 2,000 - 2,000 -
                                  1,000) = 1,500
             2)   Premium Amortization--amortization of a premium on a debt
                  obligation reduces the adjusted basis of the debt obligation

B.   Special Basis Considerations
     1. Property Acquired By Gift
         a. Basis--the basis of property received by gift is determined in the
             following manner:
             1) Appreciated Property--if the fair market value of the property
                 received by gift is greater than the donor's adjusted basis of
                 the property on the date of gift, the basis of the property is
                 equal to the donor's adjusted basis of the property increased
                 by any gift taxes paid that are attributable to the
                 appreciation in value of the property
                 a) Illustrations
                     I) An individual received stock with a fair market value
                         of $45,000 and an adjusted basis of $30,000 as a gift;
                         he sold the stock for $52,000; the donor paid gift
                         taxes of $600 on the gift
                             Basis = 30,000 + (45,000 - 30,000) / 45,000 x 600
                                   = 30,200
                             Gain = 52,000 - 30,200 = 21,800

                     II)   An individual received stock with a fair market value
                           of $45,000 and an adjusted basis of $30,000 as a gift;
                           he sold the stock for $29,000; the donor paid gift
                           taxes of $600 on the gift
                               Basis = 30,000 + (45,000 - 30,000) / 45,000 x 600
                                     = 30,200
                               Loss = 29,000 - 30,200 = 1,200

             2)   Depreciated Property--if the fair market value of the property
                  received by gift is less than the donor's adjusted basis of
                  the property on the date of gift, the basis of the property is
                  determined in the following manner:
                  a) Gain Basis--if the donee subsequently disposes of the
                      property at a gain, the basis of the property is equal to
                      the donor's adjusted basis of the property
                  b) Loss Basis--if the donee subsequently disposes of the
                      property at a loss, the basis of the property is equal to
                      the fair market value of the property


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             c)    Illustrations
                   I) An individual received stock with a fair market value
                       of $45,000 and an adjusted basis of $50,000 as a gift;
                       he sold the stock for $52,000; the donor paid gift
                       taxes of $600 on the gift
                           Gain Basis = 50,000
                           Loss Basis = 45,000
                           Gain = 52,000 - 50,000 = 2,000

                   II)   An individual received stock with a fair market value
                         of $45,000 and an adjusted basis of $50,000 as a gift;
                         he sold the stock for $29,000; the donor paid gift
                         taxes of $600 on the gift
                             Gain Basis = 50,000
                             Loss Basis = 45,000
                             Loss = 29,000 - 45,000 = 16,000

                  III)   An individual received stock with a fair market value
                         of $45,000 and an adjusted basis of $50,000 as a gift;
                         he sold the stock for $47,000; the donor paid gift
                         taxes of $600 on the gift
                             Gain Basis = 50,000
                             Loss Basis = 45,000
                             Gain = 0

     b.  Holding Period--if the donor's adjusted basis of the property
         carries over to the donee, the donee's holding period includes the
         holding period of the donor; otherwise, the donee's holding period
         starts on the date of gift
2.   Property Acquired From a Decedent
     a. Basis--the basis of property received from a decedent is equal to
         the fair market value of the property on the date of death or the
         fair market value of the property 6 months after the date of death
         if the estate is required to file a Federal estate tax return and
         the executor of the estate elects to use the alternative
         valuation date in order to reduce the Federal estate tax
         1) One-year Rule--if appreciated property was acquired by the
             decedent by gift within 1 year of the date of death and the
             property passes back to the donor of the gift or his spouse
             upon the death of the decedent, the basis of the property is
             equal to the basis of the property to the decedent
         2) Illustrations
             a) An individual received stock with a fair market value of
                 $45,000 and an adjusted basis of $30,000 from a decedent;
                 the decedent's estate paid death taxes of $600
                     Basis = 45,000



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               b)   An individual received stock with a fair market value of
                    $45,000 and an adjusted basis of $50,000 from a decedent;
                    the decedent's estate paid death taxes of $600
                        Basis = 45,000

               c)   An individual received stock with a fair market value of
                    $45,000 and an adjusted basis of $30,000 from a decedent;
                    the executor of the estate used the fair market value of
                    $43,000 on the alternative valuation date in determining
                    the death tax; the decedent's estate paid death taxes of
                    $600
                         Basis = 43,000

               d)   An individual received stock with a fair market value of
                    $45,000 and an adjusted basis of $30,000 from a decedent;
                    he gave the stock to the decedent 8 months ago as a gift;
                    the decedent's estate paid death taxes of $600
                        Basis = 30,000

     b.  Holding Period--the holding period of property received from a
         decedent is long-term
3.   Property Converted From Personal Use to Business Use
     a. Basis--the basis of property converted from personal use to
         business use is determined in the following manner:
         1) Appreciated Property--if the fair market value of the property
             converted is greater than the adjusted basis of the property
             on the date of conversion, the basis of the property is equal
             to the adjusted basis of the property
             a) Illustrations--an individual converted his condominium with
                 a fair market value of $250,000 and an adjusted basis of
                 $150,000 from personal to business use
                     Basis = 150,000

          2)   Depreciated Property--if the fair market value of the property
               converted is less than the adjusted basis of the property on
               the date of conversion, the basis of the property is
               determined in the following manner:
               a) Gain Basis--if the property is disposed at a gain, the
                   basis of the property is equal to the adjusted basis of
                   the property
               b) Loss Basis--if the property is disposed at a loss, the
                   basis of the property is equal to the fair market value of
                   the property
               c) Depreciation Basis--the basis of the property is equal to
                   the fair market value of the property
               d) Illustrations



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                    I)   An individual converted his computer with a fair
                         market value of $8,000 and an adjusted basis of
                         $10,000 from personal to business use; he sold the
                         computer for $7,000 after taking $3,200 of
                         depreciation on the computer
                             Gain Basis = 10,000 - 3,200 = 6,800
                             Loss Basis = 8,000 - 3,200 = 4,800
                             Gain = 7,000 - 6,800 = 200

                   II)   An individual converted his computer with a fair
                         market value of $8,000 and an adjusted basis of
                         $10,000 from personal to business use; he sold the
                         computer for $4,500 after taking $3,200 of
                         depreciation on the computer
                             Gain Basis = 10,000 - 3,200 = 6,800
                             Loss Basis = 8,000 - 3,200 = 4,800
                             Loss = 4,500 - 4,800 = 300

                  III)   An individual converted his computer with a fair
                         market value of $8,000 and an adjusted basis of
                         $10,000 from personal to business use; he sold the
                         computer for $5,500 after taking $3,200 of
                         depreciation on the computer
                             Gain Basis = 10,000 - 3,200 = 6,800
                             Loss Basis = 8,000 - 3,200 = 4,800
                             Gain = 0

     b.  Holding Period--if the adjusted basis of the property converted
         carries over to the property, the holding period includes the
         holding period of the property prior to the conversion; otherwise,
         the holding period starts on the date of conversion
4.   Property Received in a Marital Settlement
     a. Basis--the basis of property received in any transfer during the
         marriage or within 1 year after the marriage is terminated or in a
         transfer made under the provisions of a divorce decree is equal to
         the transferor's adjusted basis
         1) Illustrations
             a) An individual received stock with a fair market value of
                 $45,000 and an adjusted basis of $30,000 from her husband
                 in a divorce settlement
                     Basis = 30,000

             b)    An individual received stock with a fair market value of
                   $45,000 and an adjusted basis of $50,000 from her husband
                   in a divorce settlement
                       Basis = 50,000



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             c)   An individual purchased stock with an adjusted basis of
                  $30,000 from her husband for $45,000 prior to their
                  divorce
                      Basis = 30,000

     b.  Holding Period--the holding period of property received in a
         marital settlement includes the holding period of the transferor
5.   Stock Rights
     a. Basis--the basis of the stock is allocated to the stock and the
         stock rights using their relative fair market value
         1) Allocation Optional--allocation of the basis of the stock to
             the stock rights is optional if the fair market value of the
             stock rights is less than 15% of the fair market value of the
             stock
         2) Lapse of Stock Rights--if stock rights lapse, allocation of
             basis to the stock rights that lapse is not allowed
         3) Illustrations
             a) An individual owned 500 shares of stock with a basis of
                  $9,450; he received 500 stock rights that enabled him to
                  buy 1 share of stock by relinquishing 2 stock rights and
                  $16.80; the market value of the stock was $21.60 per share,
                  and the market value of the stock rights was $2.40; he
                  elected to allocate basis to the stock rights; he sold the
                  rights for $12,000
                      Fair Market Value:
                          Stock = 500 x 21.60 =       10,800
                          Stock Rights = 500 x 2.40 = _1,200
                                                      12,000

                      Allocation:
                          Stock = 10,800 / 12,000 x 9,450 = 8,505
                          Stock Rights = 1,200 / 12,000 x 9,450 = 945

                      Sale of Rights:
                          Gain = 1,200 – 945 = 255

             b)   An individual owned 500 shares of stock with a basis of
                  $9,450; he received 500 stock rights that enabled him to
                  buy 1 share of stock by relinquishing 2 stock rights and
                  $16.80; the market value of the stock was $21.60 per share,
                  and the market value of the stock rights was $2.40; he
                  elected to allocate basis to the stock rights; he exercised
                  the stock rights
                      Fair Market Value:
                          Stock = 500 x 21.60 =       10,800
                          Stock Rights = 500 x 2.40 = _1,200
                                                      12,000


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                           Allocation:
                               Stock = 10,800 / 12,000 x 9,450 = 8,505
                               Stock Rights = 1,200 / 12,000 x 9,450 = 945

                           Exercise of Stock Rights:
                               Stock Basis = 500 / 2 x 16.80 + 945 = 5,145

                  c)   An individual owned 500 shares of stock with a basis of
                       $9,450; he received 500 stock rights that enabled him to
                       buy 1 share of stock by relinquishing 2 stock rights and
                       $16.80; the market value of the stock was $21.60 per share,
                       and the market value of the stock rights was $2.40; he
                       elected to allocate basis to the stock rights; he allowed
                       the stock rights to lapse
                           Fair Market Value:
                               Stock = 500 x 21.60 =       10,800
                               Stock Rights = 500 x 2.40 = _1,200
                                                           12,000

                           Allocation:
                               Stock = 10,800 / 12,000 x 9,450 = 8,505
                               Stock Rights = 1,200 / 12,000 x 9,450 = 945

                           Stock Basis = 8,505 + 945 = 9,450

          b.   Holding Period--the holding period of the stock rights includes the
               holding period of the stock

C.   Disallowed Losses
     1. Personal Use Assets--realized losses on the sale or other disposition
         of personal use assets are not recognized
         a. Illustration--an individual sold his car which had an adjusted
             basis of $9,000 and was held for personal use for $1,500
                 Loss = (1,500 - 9,000) or 0 = 0

     2.   Wash Sales--if a taxpayer realizes a loss on the sale or other
          disposition of stock or securities and he acquires substantially
          identical stock or securities within 30 days before or after the date
          of sale or other disposition, the realized loss is not recognized to
          the extent that the stock or securities are reacquired
          a. Basis--the basis of the replacement stock or securities is
              increased by the amount of nonrecognized loss
              1) Illustrations
                  a) An individual sold 300 shares of stock with an adjusted
                      basis of $3,000 for $2,700 on July 1; he purchased 400
                      shares of the same stock for $3,200 on July 15
                          Loss = (2,700 - 3,000) or 0 = 0


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                             Basis = 3,200 + 300 = 3,500

                    b)   An individual sold 300 shares of stock with an adjusted
                         basis of $3,000 for $2,700 on July 1; he purchased 100
                         shares of the same stock for $800 on July 15
                             Loss = 200 / 300 x (2,700 - 3,000) = 200
                             Basis = 800 + 100 = 900

          b.   Holding Period--the holding period of the replacement stock or
               securities includes the holding period of the stock or securities
               sold

D.   Special Sale or Other Disposition Considerations
     1. Sale of Stock--when stock is sold, the adjusted basis of the stock
         that is sold is determined on a FIFO basis unless the taxpayer
         specifically identifies the shares that are sold
         a. Illustrations
             1) An individual purchased 100 shares of stock at $12 per share
                 on January 15 and 200 shares of stock at $17 per share on
                 April 15; he sold 50 shares of stock at $19 per share on
                 December 15; he did not specify to his broker which shares
                 were to be sold
                     Gain = 50 x 19 - 50 x 12 = 350

               2)   An individual purchased 100 shares of stock at $12 per share
                    on January 15 and 200 shares of stock at $17 per share on
                    April 15; he sold 50 shares of stock at $19 per share on
                    December 15; he specified to his broker that the shares
                    purchased on April 15 were to be sold
                        Gain = 50 x 19 - 50 x 17 = 100

     2.   Part-gift Part-sale--when property is sold at a price below its fair
          market value, the donor recognizes gain to the extent that the amount
          realized from the sale exceeds the adjusted basis of the property
          a. Donee's Basis--the adjusted basis of the property purchased is
              equal to the greater of the gift basis or the cost basis of the
              property
          b. Illustrations
              1) An individual sold land with a fair market value of $50,000
                  and an adjusted basis of $15,000 to his son for $20,000
                       Father:
                            Gain = (20,000 + 3,000) - 15,000 = 8,000
                       Son:
                            Basis = 15,000 or 20,000 = 20,000

               2)   An individual sold land with a fair market value of $50,000
                    and an adjusted basis of $30,000 to his son for $20,000


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                Father:
                     Gain = 20,000 – 30,000 = (10,000) or 0 = 0
                Son:
                     Basis = 30,000 or 20,000 = 30,000

3.   Part-contribution Part-sale--when property is sold to a charitable
     organization at a price below its fair market value or is transferred
     subject to a liability to a charitable organization, gain is
     recognized to the extent that the amount realized from the sale or
     transfer exceeds the portion of the adjusted basis of the property
     allocated to the amount realized using the fair market value of the
     property
     a. Illustration--an individual donated land with a fair market value
         of $40,000 and an adjusted basis of $16,000 and subject to a
         $10,000 liability to his college; his college assumed the
         liability on the land
             Gain = 10,000 - 10,000 / 40,000 x 16,000 = 6,000
                 His charitable contribution is $30,000 (40,000 - 10,000).




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