Basis - Real Property Flashcards

Basis - Real Property Flashcards BasisYour basis is the amount of your investment in property for tax purposes. Use the basis to figure the gain or loss on the sale, exchange, or other disposition of property. Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses.The exchange of property for the same kind of property is the most common type of nontaxable exchange. To qualify as a like-kind exchange, the property traded and the property received must be both of the following.- Qualifying property.- Like-kind property.The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid.Qualifying property Adjusted Basis DefinitionBefore figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. The result is the adjusted basis.Loss (changed to business or rental use): EXAMPLE Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date.Reduce that amount ($180,000) by the depreciation deductions ($37,500). The basis for loss is $142,500

($180,000 $37,500).

If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. The rest is the basis of the like-kind property.Basis for Depreciation If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs.Basis for Depreciation If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of

the gift, explained later.Figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property

Settlement costsYour basis includes the settlement fees and closing costs you paid for buying the property. (A fee for buying property is a cost that must be paid even if you buy the property for cash.) Do not include fees and costs for getting a loan on the property in your basis.Sale of Property (changed to business or rental use)If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss.Community Property EXAMPLEYou and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse's estate. The FMV of the community interest was $100,000.The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse's heirs is also $50,000.If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with certain specific adjustments.Decrease Adjustments for Similar or Related property Loss (changed to business or rental use) Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Then make adjustments (increases and decreases) for the period after the change in the property's use.Gain (changed to business or rental use) The basis for figuring a gain is your adjusted basis in the property when you sell the property.Do you add to your basis cost of local improvements?Yes. Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Do not deduct them as taxes. However, you can deduct as taxes assessments for maintenance or repairs, or for meeting

interest charges related to the improvements.EX: Your city

changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Add the assessment to your property's basis. In this example, the assessment is a depreciable asset.A bargain purchase is a purchase of an item for less than its FMV. If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Your basis in the property is its FMV (your purchase price plus the amount you include in income).If the difference between your purchase price and the FMV is

a qualified employee discount, do not include the difference in income. However, your basis in the property is still its FMV. See Employee Discounts in Pub. 15-B.

Taxable Exchange: Def

Real Property DefinitionReal property, also called real estate, is land and generally anything built on, growing on, or attached to land.If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property.Settlement fees and closing costs you CANNOT include in the basis of property.

• Casualty insurance premiums.2. Rent for occupancy of

the property before closing.3. Charges for utilities or other