© Copyright by M. Ray Gregg. All rights reserved. 1 Federal Income Tax

© Copyright by M. Ray Gregg. All rights reserved. 2

3

4 Introduction to Capital Gains and Losses So You Sold Some Property …...

© Copyright by M. Ray Gregg. All rights reserved. 5 What must we know about the asset? I. Type of asset sold A.Personal B.Business

© Copyright by M. Ray Gregg. All rights reserved. 6 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” B.Business

© Copyright by M. Ray Gregg. All rights reserved. 7 Capital Assets Section 2619 Capital assets include all assets held by the taxpayer except: 1.Stock in trade of the taxpayer or other property of a kind that would properly be included in the inventory of the taxpayer if on hand at the close of the tax year. 2.Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. 3.Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in 1. and 2. above. 4.Depreciable property used in the taxpayer's trade or business. 5.Real property used in the taxpayer's trade or business. 6.Certain copyrights, and literary, musical or artistic compositions 7.Letters, memoranda or similar property in the hands of the writer, donees of the writer and persons to whom they were sent or for whom they were produced. 8.U.S. government publications (Congressional Record) received from the government without charge or below the price sold to the public, in the hands of the recipient and carryover_basis transferees (Code Sec. 1221) EXCEPTEXCEPT

© Copyright by M. Ray Gregg. All rights reserved. 8 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” 1.Gains and Losses 2.Gains and Losses B.Business

© Copyright by M. Ray Gregg. All rights reserved. 9 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” 1.Gains and Losses 2.Gains and Losses B.Business Consider an Example

© Copyright by M. Ray Gregg. All rights reserved. 10 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” 1.Gains and Losses 2.Gains and Losses B.Business Gains AND Losses

© Copyright by M. Ray Gregg. All rights reserved. 11 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” 1.Gains and Losses 2.Gains and Losses B.Business Consider Another Example

© Copyright by M. Ray Gregg. All rights reserved. 12 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” 1.Gains and Losses 2.Gains and Losses B.Business Gains but NOT Losses

© Copyright by M. Ray Gregg. All rights reserved. 13 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” 1.Gains and Losses 2.Gains and Losses B.Business Here’s Another One

© Copyright by M. Ray Gregg. All rights reserved. 14 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” 1.Gains and Losses 2.Gains and Losses B.Business

© Copyright by M. Ray Gregg. All rights reserved. 15 What must we know about the asset? I. Type of asset sold A.Personal -- “capital” 1.Gains and losses 2.Gains and losses B. Business Will Complete Later not

© Copyright by M. Ray Gregg. All rights reserved. 16 II. Other Information Needed? BA

© Copyright by M. Ray Gregg. All rights reserved. 17 Other Information Needed? BA A.Sales Price (and date)II.

© Copyright by M. Ray Gregg. All rights reserved. 18 Other Information Needed? BA A.Sales Price (and date) B.–Basis (Cost) (and date) II. Today’s Lesson

© Copyright by M. Ray Gregg. All rights reserved. 19 Other Information Needed? BA A.Sales Price (and date) B.–Basis (Cost) (and date) C.=Gain or (Loss) II.

© Copyright by M. Ray Gregg. All rights reserved. 20 Other Information Needed? BA A.Sales Price (and date) B.–Basis (Cost) (and date) C.=Gain or (Loss) II.

© Copyright by M. Ray Gregg. All rights reserved. 21 II. Other Information Needed? BA III. III.Holding Period A.Short-term B.Long-term

© Copyright by M. Ray Gregg. All rights reserved. 22 Which would you prefer? Gain ST LT

© Copyright by M. Ray Gregg. All rights reserved. 23 Which would you prefer? Loss ST LT

© Copyright by M. Ray Gregg. All rights reserved. 24 Special Treatment of Long-Term Gains LTCGD * * *

© Copyright by M. Ray Gregg. All rights reserved. 25 Special Treatment of Long-Term Gains LTCGDalternate tax rate * *

© Copyright by M. Ray Gregg. All rights reserved. 26 Special Treatment of Long-Term Gains LTCGDalternate tax rate reduced rates * *

© Copyright by M. Ray Gregg. All rights reserved. 27 Special Treatment ’54 – ’69 ST100% ($1,000 annual maximum) LT *

© Copyright by M. Ray Gregg. All rights reserved. 28 Special Treatment ’54 – ’69 ST100% ($1,000 annual maximum) LT50 / 50 LTCGD / taxed ($1,000 annual maximum) * *

© Copyright by M. Ray Gregg. All rights reserved. 29 Special Treatment ($1,000 annual maximum) 50 / 50 LTCGD / taxed LT ($1,000 annual maximum) 100%ST ’54 – ’69 * $1,000

© Copyright by M. Ray Gregg. All rights reserved. 30 Special Treatment ’54 – ’69’69 – ’86 ST100% ($1,000 annual maximum) ($3,000 annual maximum) LT50 / 50 LTCGD / taxed ($1,000 annual maximum) *

© Copyright by M. Ray Gregg. All rights reserved. 31 Special Treatment ’54 – ’69’69 – ’86 ST100% ($1,000 annual maximum) ($3,000 annual maximum) LT50 / 50 LTCGD / taxed 60 / 40 LTCGD / taxed ($1,000 annual maximum) ($3,000 annual maximum) * *

© Copyright by M. Ray Gregg. All rights reserved. 32 Special Treatment ’54 – ’69’69 – ’86After ’86 ST100% ($1,000 annual maximum) ($3,000 annual maximum) LT50 / 50 LTCGD / taxed 60 / 40 LTCGD / taxed ($1,000 annual maximum) ($3,000 annual maximum) *

© Copyright by M. Ray Gregg. All rights reserved. 33 Special Treatment ’54 – ’69’69 – ’86After ’86 ST100% ($1,000 annual maximum) ($3,000 annual maximum) ($3,000 annual maximum) LT50 / 50 LTCGD / taxed 60 / 40 LTCGD / taxed 100% ($1,000 annual maximum) ($3,000 annual maximum) ($3,000 annual maximum) * Alternative Tax Rate *

© Copyright by M. Ray Gregg. All rights reserved. 34 Special Treatment of Long-Term Gains LTCGDalternate tax rate reduced rates *

© Copyright by M. Ray Gregg. All rights reserved. 35

© Copyright by M. Ray Gregg. All rights reserved. 36 How can one acquire property? Name as many ways as you can think of. Be creative!

© Copyright by M. Ray Gregg. All rights reserved. 37 find it win it purchase it marry someone who owns it receive it as compensation divorce inherit it receive it as a gift steal it squat (as the pioneers did) trade for it

© Copyright by M. Ray Gregg. All rights reserved. 38 find it win it purchase it marry someone who owns it receive it as compensation divorce inherit it steal it receive it as a gift squat (as the pioneers did) trade for it

© Copyright by M. Ray Gregg. All rights reserved. 39 Purchase Gift Inherit Trade Later

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Asset acquired by purchase? Yes (after 3/1/13) No Yes 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Cost +Capital Improvements —Accumulated Depr =Adjusted Basis 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Asset acquired by purchase? Yes (after 3/1/13) No 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Acquired by Gift? Yes (after 1920) No (inheritance) Yes 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) FMV > donor’s adjusted basis? Yes No Donor’s Basis 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved. 46 “Step into the shoes of the donor.”

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Acquired by Gift? Yes (after 1920) No (inheritance) NO 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) FMV 6 months after date of death FMV on date of death alt. valuation date elected? Yes No 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) FMV 6 months after date of death FMV on date of death alt. valuation date elected? Yes No Inherited Property = FMV on DOD “Stepped-Up” Basis 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) “Stepped-Up” Basis 2 FMV - annual exclusion “Step into the shoes of the donor.”

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) “Stepped-Up” Basis 2 FMV - annual exclusion “Step into the shoes of the donor.”

© Copyright by M. Ray Gregg. All rights reserved. 52 Grandpa, who is on his death bed, wants YOU to have his 5,000 acre farm.

© Copyright by M. Ray Gregg. All rights reserved. 53 Should he give it to you? Or should he change his will?

© Copyright by M. Ray Gregg. All rights reserved. 54 Grandpa rec’d farm as gift from great-grandpa who had paid $1 per acre. FMV today is $500 per acre.

© Copyright by M. Ray Gregg. All rights reserved. 55 Grandpa rec’d farm as gift from great-grandpa who had paid $1 per acre. FMV today is $500 per acre.

© Copyright by M. Ray Gregg. All rights reserved. 56 Received As A Gift (simplified version) Sales Price$2,500,000

© Copyright by M. Ray Gregg. All rights reserved. 57 Received As A Gift (simplified version) Sales Price$2,500,000 –Your basis ? ? ?

© Copyright by M. Ray Gregg. All rights reserved. 58 Received As A Gift (simplified version) Sales Price$2,500,000 –Your basis 5,000

© Copyright by M. Ray Gregg. All rights reserved. 59 Received As A Gift (simplified version) Sales Price$2,500,000 –Your basis 5,000 Taxable Gain$2,495,000

© Copyright by M. Ray Gregg. All rights reserved. 60 Inherited (simplified version) Sales Price$2,500,000

© Copyright by M. Ray Gregg. All rights reserved. 61 Inherited (simplified version) Sales Price$2,500,000 –Your basis ? ? ?

© Copyright by M. Ray Gregg. All rights reserved. 62 Inherited (simplified version) Sales Price$2,500,000 –Your basis 2,500,000

© Copyright by M. Ray Gregg. All rights reserved. 63 Inherited (simplified version) Sales Price$2,500,000 –Your basis 2,500,000 Taxable Gain -0-

© Copyright by M. Ray Gregg. All rights reserved. 64 Which would YOU prefer? ??? ???. ???

© Copyright by M. Ray Gregg. All rights reserved. 65 Inherited (simplified version) Sales Price$2,500,000 –Your basis 2,500,000 Taxable Gain -0-

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) FMV 6 months after date of death FMV on date of death alt. valuation date elected? Yes No Best! 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Acquired by Gift? Yes (after 1920) No (inheritance) Yes 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) FMV > donor’s adjusted basis? Yes No Donor’s Basis 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s basis +“all” GT pd =Basis (limited) 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s basis +“all” GT pd =Basis (limited) Donor’s basis +“some” GT pd =Basis 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s basis +“all” GT pd =Basis (limited) 2 FMV - annual exclusion Illustration

© Copyright by M. Ray Gregg. All rights reserved. 72 1) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $20,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 a. 1) Basis $10,000 + Gift Tax 1,000 11,000

© Copyright by M. Ray Gregg. All rights reserved. 73 1) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $20,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 a. 1) Sales Price$21,000 Basis $10,000 + Gift Tax 1,000 11,000 Gain $10,000

© Copyright by M. Ray Gregg. All rights reserved. 74 Illustration 1. a. 3)

© Copyright by M. Ray Gregg. All rights reserved. 75 3) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $15,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 a. 3) Basis $10,000 + Gift Tax 1,000 11,000

© Copyright by M. Ray Gregg. All rights reserved. 76 3) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $15,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 a. 3) Sales Price$ 9,000 Basis $10,000 + Gift Tax 1,000 11,000 Loss ($ 2,000)

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s basis +“some” GT pd =Basis 2 FMV - annual exclusion Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 78 1) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $20,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 b. 1) Basis $10,000 + Gift Tax ??? ? ? ?

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Gift tax x “net appreciation” total value of property 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $1,000 x “net appreciation” total value of property 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $1,000 x ($20,000 - $10,000) total value of property 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved. 82 Assumption For introductory purposes, assume donor gave donee other gifts totaling > $11,000.

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $1,000 x $10,000 = $500 $20,000 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved. 84 1) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $20,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 b. 1) Basis $10,000 + Gift Tax ,500

© Copyright by M. Ray Gregg. All rights reserved. 85 1) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $20,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 b. 1) Sales Price $21,000 Basis $10,000 + Gift Tax ,500

© Copyright by M. Ray Gregg. All rights reserved. 86 1) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $20,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 b. 1) Sales Price $21,000 Basis $10,000 + Gift Tax ,500 Gain $10,500

© Copyright by M. Ray Gregg. All rights reserved. 87 Consider Another Illustration

© Copyright by M. Ray Gregg. All rights reserved. 88 3) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $15,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 b. 3) Basis $10,000 + Gift Tax ??? ? ? ?

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Gift tax x “net appreciation” total value of property 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $1,000 x “net appreciation” total value of property 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $1,000 x $5,000 total value of property 2 FMV - annual exclusion

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $1,000 x $5,000 = $333 $15,000 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved. 93 3) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $15,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 b. 3) Basis $10,000 + Gift Tax ,333

© Copyright by M. Ray Gregg. All rights reserved. 94 3) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $15,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 b. 3) Sales Price $ 9,000 Basis $10,000 + Gift Tax ,333

© Copyright by M. Ray Gregg. All rights reserved. 95 3) After 1976, some generous person gave you an asset for which they paid $10,000 and which was worth $15,000 at the time of the gift. The donor paid $1,000 in gift tax. Handout Example 1 b. 3) Sales Price $ 9,000 Basis $10,000 + Gift Tax ,333 Loss ($ 1,333)

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) FMV > donor’s adjusted basis? Yes No NO 2 FMV - annual exclusion

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) 2 say something about $10,000 annual exclusion 2 FMV - annual exclusion

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s Basis FMV Sales Price Area of Gain Area of Loss Neither Gain nor Loss Sales Price 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved. 99 Here Are Some Illustrations

© Copyright by M. Ray Gregg. All rights reserved ) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $8,000 at the time of the gift. The donor paid $500 in gift tax. Handout Example 1 a. 4) Basis $ ? ? ?

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s Basis FMV Sales Price Area of Gain 2 FMV - annual exclusion

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $10,000 $8,000 Sales Price Area of Gain 2 FMV - annual exclusion

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $10,000 $8,000 $11,000 Area of Gain 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved ) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $8,000 at the time of the gift. The donor paid $500 in gift tax. Handout Example 1 a. 4) Basis $10,000 + Gift Tax ? ? ? ? ? ?

None! All or Some Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved ) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $8,000 at the time of the gift. The donor paid $500 in gift tax. Handout Example 1 a. 4) Sales Price$11,000 Basis for Gain $10,000 + Gift Tax ,000 Gain $ 1,000

© Copyright by M. Ray Gregg. All rights reserved. 107 Illustration 1. a. 5)

© Copyright by M. Ray Gregg. All rights reserved ) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $8,000 at the time of the gift. The donor paid $500 in gift tax. Handout Example 1 a. 5) Basis $ ? ? ?

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s Basis FMV Sales Price Area of Loss 2 FMV - annual exclusion

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) $10,000 $8,000 $7,500 Area of Loss 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved ) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $8,000 at the time of the gift. The donor paid $500 in gift tax. Handout Example 1 a. 5) Basis for Loss $8,000 + Gift Tax -0- 8,000

© Copyright by M. Ray Gregg. All rights reserved ) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $8,000 at the time of the gift. The donor paid $500 in gift tax. Handout Example 1 a. 5) Sales Price $7,500 Basis for Loss $8,000 + Gift Tax -0- 8,000 Loss ($ 500)

© Copyright by M. Ray Gregg. All rights reserved. 113 Illustration 1. a. 6)

© Copyright by M. Ray Gregg. All rights reserved ) Prior to 1977, some generous person gave you an asset for which they paid $10,000 and which was worth $8,000 at the time of the gift. The donor paid $500 in gift tax. Handout Example 1 a. 6) Sales Price$9,000 Basis $ ? ? ?

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s Basis FMV Sales Price Area of Gain Area of Loss Sales Price 2 FMV - annual exclusion

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s Basis of $10,000 Sales Price of $9,000 2 FMV - annual exclusion Area of Gain Yields a LOSS!

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) FMV of $8,000 Area of Loss Sales Price of $9,000 2 FMV - annual exclusion Yields a GAIN! Therefore

Possible to Have Two Bases Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) Donor’s Basis FMV Neither Gain nor Loss Sales Price 2 FMV - annual exclusion

© Copyright by M. Ray Gregg. All rights reserved. 119 Answers for b (after 1976) would be the same as for part a. since no gift tax added More of Handout

Determining the Basis of Assets Asset acquired by purchase? cost + capital improvements - accumulated depreciation = adjusted basis Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) basis for donor’s adj. basis plus FMV > donor’s adjusted basis? All dispositions yield LONG TERM results FMV 6 months after date of death FMV on date of death alt. valuation date elected? Acquired by gift? Yes (after 3/1/13) Yes (after 1920) Yes before 1/1/77 gain Yes No (inheritance) No loss after 12/31/76 1 “net appreciation” = (FMV - donor’s adjusted basis) 2 FMV - annual exclusion