initial basis of property
cost of property-includes all amounts to purchase property, prepare property for use, and place it into service -Real property: land and all items permanently affixed to the land-Personal Property: all property not already classified as real property
holding period
begins when property is acquired
Reduce Basis for Accumulated Depreciation
basis adjusted downward for amount of any depreciation taken by the taxpayer that is allowed-becomes the adjusted basis
Basis "Spreading.
receipt of nontaxable stock dividend requires shareholder to spread out basis over original and new shares received-results in same total basis but each stock has a lower basis
donor's rollover cost basis
property acquired as a gift has a cost basis at the time the gift was received by the taxpayer -basis increases by gift tax paid that is attributable to the net appreciation in the value of the gift -gains/losses are calculated using rollover cost basis
Lower fmv at date of gift
if FMV is lower than rollover cost basis at date of gift then the basis for donee depends on future selling price of the asset
Sale of Gifts at Price Greater than Donor's Rollover Basis (Gain Basis)
gain is difference b/w the sales price and the rollover basis
Sale of Gift at Price Less than Lower FMV (Loss Basis)
the basis of gift for purpose of determining the is the FMV of the gift at the time it was given
Sale Less than Rollover Cost Basis but Greater than Lower FMV (in the middle)
neither gain or loss is recognized-basis is the middle selling price
Gifted Property Basis for Depreciation
Lesser of - the donor's adjusted basis at date of gift; or- the FMV at the date of the giftamount of accumulated depreciation will reduce taxpayer's basis calculated for gain or loss purposes
holding period for gift
-rollover cost & original holding period -gift normally assumes the donor's holding period but if FMV is used as basis then holding period starts at date of gift
Inherited Property Basis
generally takes as its basis the step up or step down to FMV at date of decedent's death
alternate valuation date
for FMV either the date of distribution/sale or max 6 months after death -only available if its use lowers the entire gross estate and estate tax
inherited property holding period
automatically considered long term
capital expenditures
cost of all intangible and tangible property with a useful life of more than one year must be capitalized
Repairs and Maintenance
costs incurred to maintain property and do not add significant value to property or extend life-immediately expensed
Improvements
must be capitalizedimprovement if: -extends useful life-restores property's value-adapts property to a new or different use
materials & supplies
is it costs $200 or less or it is consumed in one year then it is immediately expensed
De minimis safe harbor
a taxpayer with an audited FS can deduct the amount paid for items costing up to $5,000-taxpayers with no audited FS the amount is $2,000 per item-if cost of item is more than allowable amount then entire cost must be capitalized
Section 267
prevents taxpayers from shifting ownership of stock or property to a related person or entity to get beneficial provisions-constructive ownership rules: stock held by certain people related to taxpayer will be treated as if actually held by taxpayer
related parties
-siblings-spouses-ancestors-entities that are more than 50% owned directly or indirectly -controlled groups -various relationships between trusts, grantors, fiduciaries, executors, & beneficiaries-tax exempt organizations
constructive ownership
Rule 1: stock owned directly/indirectly by a corp etc Rule 2: individual considered as owning stock owned by those family members related in Section 267Rule 3: Stock constructively owned by a person under Rule 1 shall be treated as actually owned by that person for the purpose of applying either Rule 1 or 2 in other situations
capital gains and related parties
-capital gain taxes are imposed on sale of all non-depreciable property b/w related parties -Exceptions: -two spouses -an individual and a 50% plus controlled corp or partnership (gain taxed at ordinary income)
capital losses and related parties
losses are disallowed
basis rules and related parties
Same as gift tax basis rules
gain rules
recognized only to the extent that the future sales price exceeds the previous relative's cost basis
loss rules
recognized only to the extent that the sales price to the unrelated party is lower than the acquiring relative's original purchase price in asset (FMV)
no gain or loss rules
No gain or loss is recognized when the sale price to the unrelated party is between the original cost basis and related party purchase price
holding period and related parties
Starts with new owner's period of ownership
Section 7872
prevents parties from offering below market interest rates on loans that could particularly appealing to related parties -individuals who make a below market loan generally must report any foregone interest as interest income
Below market loan provisions apply to following loans
-Gifts-Compensation Related Loan-Corporation Shareholder Loans-Tax Avoidance Loans-Other below market loans -Loans to Qualified Continuing Care Facilities
De Minimis Exception
-Gift Loans B/W Individuals: imputed interest rules will not apply if loan doe snot exceed $10,000-Compensation-Related & Corp Shareholder Loans: imputed interest rules will not apply if loan does not exceed $10,000
Special Rules for Gift Loans Not in Excess of $100,000
if loan is $100,000 or less the foregone interest to be include in income by lender and deducted by borrower is limited to amount of borrower's net investment income for the year.-if borrower's net investment income is $1,000 or less then foregone interest is 0
Calculation of Foregone Interest
Amount of Interest that would be payable - interest actually payable on loan for the period