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What is the basis of property received as
a gift?
To figure the basis of property you get as a gift, you must know its adjusted
basis to the donor just before it was given to you. You also must know its fair
market value (FMV) at the time it was given to you. If the FMV of the property
at the time of the gift is less than the donor's adjusted basis, your basis
depends on whether you have a gain or loss when you dispose of the property.
Your basis for figuring gain is the same as the donor's adjusted basis, plus or
minus any required adjustments to basis while you held the property. Your basis
for figuring a loss is the FMV of the property when you received the gift, plus
or minus any required adjustments to basis while you held the property.
If you use the donor's adjusted basis for figuring a gain and get a loss, and
then use the FMV for figuring a loss and get a gain, you have neither a gain nor
loss on the sale or disposition of the property.
If the FMV 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.
Also, for figuring gain or loss, you must increase or decrease your basis by any
required adjustments to basis while you held the property.
If you received a gift before 1977, increase your basis in the gift (the donor's
adjusted basis) by any gift tax paid on it. However, do not increase your basis
above the FMV of the gift at the time it was given to you.
If you received a gift after 1976, increase your basis by the part of the gift
tax paid on it that is due to the net increase in value of the gift. Figure the
increase to basis by multiplying the gift tax paid by the following fraction.
The numerator of the fraction is the net increase in value of the gift and the
denominator is the amount of the gift.
The net increase in value of the gift is the FMV of the gift less the donor's
adjusted basis. The amount of the gift is its value for gift tax purposes, after
reduction by any annual exclusion and any marital or charitable deduction that
applies to the gift.
I have investment property. Can you
explain the term basis of assets?
Basis is your investment in property for tax purposes. Before you can figure any
gain or loss on a sale, exchange, or other disposition of property, or figure
allowable depreciation, you must determine the adjusted basis. Adjusted basis is
the result of increasing or decreasing your original basis according to certain
events. Your original basis is usually your cost to acquire the asset.
Increases
to basis include but are not limited to:
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Improvements
having a useful life of more than a year
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Assessments for local
improvements
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Sales tax
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The cost of extending
utilities lines to the property
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Legal fees such as the
cost of defending or perfecting title
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Zoning costs
Decreases to basis include but
are not limited to:
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Depreciation
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Nontaxable corporate
distributions
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Casualty and theft losses
-
Easements
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Rebates from the
manufacturer or seller
I sold my principal residence this year.
What now?
If you meet the ownership and use tests, you will generally only need to report
the sale of your home if your gain exceeds a certain dollar prescribed by law.
You may be entitled to exclude gain from income if during the 5-year period
ending on the date of the sale, you must have:
-
Owned the home for at least
2 years (the ownership test), and
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Lived in the home as your
main home for at least 2 years (the use test).
If you owned and lived in the property as your
main home for less than 2 years, you may still be able to claim an exclusion in
some cases.
If you were on qualified extended duty in the U.S. Armed Services or the Foreign
Service you may suspend the five-year test period for up to 10 years. You are on
qualified extended duty when the extended duty lasts for more than 90 days or
for an indefinite period AND:
-
At a duty station that is
at least 50 miles from the residence sold, or
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When residing under orders
in government housing.
This change applies to home sales after May 6, 1997. You may use this provision
for only one property at a time and one sale every two years.
If I sell my home and use the money I
receive to pay off the mortgage, do I have to pay taxes on that money?
It is not the money you receive for the sale of your home, but the amount of
gain on the sale over your cost, or basis, that determines whether you will have
to include any proceeds as taxable income on your return. You may be able to
exclude any gain from income up to a maximum dollar limit. If you can exclude
all of the gain, you do not need to report the sale on your tax return.
If I take the exclusion of capital gain
tax on the sale of my old home this year, can I also take the exclusion again if
I sell my new home in the future?
With the exception of the 2-year waiting period, there is no limit on the number
of times you can exclude the gain on the sale of your principle residence so
long as you meet the ownership and use tests.
I lived in a home as my principal
residence for the first 2 of the last 5 years. For the last 3 years, the home
was a rental property before selling it. Can I still avoid the capital gains tax
and, if so, how should I deal with the depreciation I took while it was rented
out?
-
If, during
the 5-year period ending on the date of sale, you owned the home for at
least 2 years and lived in it as your main home for at least 2 years, you
can exclude up to the maximum dollar limit. However, you cannot exclude the
portion of the gain equal to depreciation allowed or allowable for periods
after May 6, 1997. If you can show by adequate records or other evidence
that the depreciation allowed was less than the amount allowable, the amount
you cannot exclude is the amount allowed
One should consult
with a qualified tax professional prior to implementing any tax planning
strategies.
If you are a tax,
insurance, financial or real estate planning professional receiving this
newsletter, please call our office and introduce yourself to us. We are always
seeking to grow our referral network and expose more service professionals to
our client base.
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