Basis of Assets Presented by Greg Martinez March 2013

Basis is the amount of your investment in property for tax purposes. Basis is used to figure the following:  Depreciation, amortization, depletion  Casualty losses  Gain or loss on the sale or other disposition of property. Overview Information taken from Publication 551

Increases and decreases to basis

Facts  House purchased in 2001 for $135,000  Refinanced in 2005 for $350,000  Loan proceeds used to buy another house  What is the basis of the house purchased in 2001? Example: Refinancing a house $135,000 – because the loan was not used to improve the house

Facts:  House was purchased in 2005 for $700,000  A cash down payment of $180,000 was made  A first mortgage was taken out for $500,000 to buy the house  A second mortgage for $50,000 was take out and used for the following:  Additional down payment - $20,000  Landscaping for the new house - $25,000  Pay off credit cards - $5,000 Example: Forgiveness of Debt

The second mortgage was settled for $4,000. What is the basis of the house? Example: Forgiveness of Debt Second mortgage of $50,000 was settled for $4,000 resulting in a debt forgiveness of $46,000. The credit card debt is considered to be discharged first giving a mortgage debt forgiven of $41,000 Answer Cost of house$700,000 Improvements 25,000 Mortgage debt forgiven Adjusted basis$684,000

 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 a 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 adjustment to basis while you held the property.  Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property. Property received as a gift

 Example – You receive a gift of a car that cost $20,000 and had a fair market value of $10,000 on the day of the gift.  You sell the car for $8,000, how much is the gain or loss? Property received as a gift The loss is $2,000 ($10,000 - $8,000)

 Example – You receive a gift of a gold ring that had a basis of $2,500 and a fair market value of $4,000.  You sell the ring for $6,000, how much is the gain or loss? Property received as a gift The gain is $3,500 ($6,000 - $2,500)