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

Federal Tax Course Intro/ Overview Deductions/ Credits Property Transactions There are three major sub-divisions in this course. During the first few weeks we were exposed to an overview of taxation and rules for federal income taxation; we also considered items of revenue which would be included in and excluded from gross income. The second major area was deductions and personal credits. In this area we covered employee business expenses, some deductions of sole proprietorships, and itemized deductions for individuals. Personal credits such as the child credit, child and dependent care credit, earned income credit, and the newer education credits (HOPE and lifetime learning) were also important in this section. Recently we have turned our attention to property transactions. © Copyright by M. Ray Gregg. All rights reserved.

Property Transactions
Depreciation Capital G & L Exchanges Property transactions begin with the determination of depreciation of business use assets. This presentation continues with the next major area of property transactions. © Copyright by M. Ray Gregg. All rights reserved.

Introduction to Capital Gains and Losses
So You Sold Some Property … ... Introduction to Capital Gains and Losses Pretend a client of yours is sitting across the desk from you at his annual visit for income tax preparation. In conversation with him you hear him mention that he disposed of some property during the year. You follow-up the conversation needing to know more information from him in order to be able to access he tax implications. © Copyright by M. Ray Gregg. All rights reserved.

What must we know about the asset?
I. Type of asset sold A. Personal B. Business Generally speaking, there seem to be two major categories of property: assets held for personal use, and assets held for business use. © Copyright by M. Ray Gregg. All rights reserved.

Capital Assets Section 2619 Capital assets include all assets held by the taxpayer except: 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. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. 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. Depreciable property used in the taxpayer's trade or business. Real property used in the taxpayer's trade or business. Certain copyrights, and literary, musical or artistic compositions 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. 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) E X C P T In the tax code, the definition of capital assets is stated in a negative manner. Capital assets are not this or this or this; capital assets are not THIS either! Would someone just please tell me what capital assets are? © Copyright by M. Ray Gregg. All rights reserved.

I. Type of asset sold A. Personal -- “capital” 1. Gains and Losses 2. Gains and Losses B. Business From experience, I have concluded that capital assets generally fall into two broad categories: When capital assets are sold for a gain, the gain will be included in gross income and subject to tax. A loss from the sale of the same asset WOULD BE deductible on the tax return. A gain on the sale of other capital assets would also be included in gross income; however, a loss from the sale of these assets would be considered “personal” in nature, and, therefore, would NOT be deductible on the tax return. The differences between these two groups of assets are best illustrated through examples. Consider a few on the following slides. © Copyright by M. Ray Gregg. All rights reserved.

Consider an Example 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 a taxpayer who who sold shares of corporate stock for a gain. Would be gain be taxed? Certainly. If the shares of stock were sold for a LOSS, would the loss be deductible? Yes, the loss would be deductible on the tax return. © Copyright by M. Ray Gregg. All rights reserved.

I. Type of asset sold A. Personal -- “capital” 1. Gains and Losses 2. Gains and Losses B. Business Gains AND Losses From these answers we can conclude that stock must be an example of which kind of capital asset? Category “A. 1.” Where both gains and losses give rise to tax consequence. © Copyright by M. Ray Gregg. All rights reserved.

Consider Another Example I. Type of asset sold A. Personal -- “capital” 1. Gains and Losses 2. Gains and Losses B. Business Consider this example: A taxpayer bought his “intended” a diamond engagement ring; they married, and she has been wearing the diamond ring for 30+ years. Suppose they are considering selling the ring in order to purchase a new, larger diamond. Would the gain from the sale of the diamond be taxed? Certainly. (At some point we must conclude that ALL gains are to be taxed!) If the diamond were sold for a LOSS, would the loss be deductible? No. Because it is purely PERSONAL. The loss would NOT be deductible on the tax return. © Copyright by M. Ray Gregg. All rights reserved.

I. Type of asset sold A. Personal -- “capital” 1. Gains and Losses 2. Gains and Losses B. Business Gains but NOT Losses From these answers we can conclude that this diamond must be an example of which kind of capital asset? Category “A. 2.” Where gains are taxed but losses are not deductible. © Copyright by M. Ray Gregg. All rights reserved.

Here’s Another One 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: Taxpayer and spouse received a tip that diamonds were a good investment. Several years ago they bought a diamond, left it wrapped in the fancy paper from the jewelry store, never mounted it, and have had it stored in their safety deposit box since. They have decided to sell the diamond. If sold for a gain, would the gain be taxed? Certainly. (Everyone should realize that by now!) If the diamond were sold for a LOSS, would the loss be deductible? Yes! Because it was an investment, the loss WOULD be deductible on the tax return. © Copyright by M. Ray Gregg. All rights reserved.

I. Type of asset sold A. Personal -- “capital” 1. Gains and Losses 2. Gains and Losses B. Business From these answers we can conclude that this diamond must be an example of which kind of capital asset? A Where gains and losses BOTH give rise to tax consequence. © Copyright by M. Ray Gregg. All rights reserved.

I. Type of asset sold A. Personal -- “capital” 1. Gains and losses 2. Gains and losses B. Business 1. 2. 3. Will Complete Later This presentation is primarily about “capital” assets – personal use assets. At an appropriate time a few class periods from now, we will consider the tax treatment of gains and losses from the sale of business-use assets. Generally speaking, there are three broad categories which we will consider. not © Copyright by M. Ray Gregg. All rights reserved.

II. Other Information Needed?
B A Now back to our example of the client sitting across the desk from you. So. You sold some property this year, eh? What other information do we need from this client in order to properly reflect this transactions on his tax return? We need to know the selling price of the asset sold. Generally, especially since the transaction occurred during the previous year, taxpayers usually know this information. (They are usually wise enough to realize the transaction has tax consequence and smart enough to provide you with paperwork describing the sales transaction.) We must also know the date of sale. Again, the taxpayer will usually keep and provide you with information regarding the sale. This information is usually dated. © Copyright by M. Ray Gregg. All rights reserved.

Other Information Needed?
B A II. A. Sales Price (and date) Now back to our example of the client sitting across the desk from you. So. You sold some property this year, eh? What other information do we need from this client in order to properly reflect this transactions on his tax return? We need to know the selling price of the asset sold. Generally, especially since the transaction occurred during the previous year, taxpayers usually know this information. (They are usually wise enough to realize the transaction has tax consequence and smart enough to provide you with paperwork describing the sales transaction.) We must also know the date of sale. Again, the taxpayer will usually keep and provide you with information regarding the sale. This information is usually dated. © Copyright by M. Ray Gregg. All rights reserved.

Today’s Lesson B A II. A. Sales Price (and date) B. – Basis (Cost) (and date) What else? We also need to know the price at which the property was originally acquired – its cost (for accounting purposes) or its “basis” for tax purposes. Yes, we have used the term “basis” on occasion during this course; however, this is the official time to learn the meaning of that expression. (That is my penalty for choosing to do the chapters out of order.) What else? We must know the date the property was acquired (and technically, the manner in which the property was acquired). Determining the basis and date acquired are often greater challenges for the taxpayer. If the asset was acquired a long, long time ago, the records may not be available to provide this information. None the less, we need to know. Why? © Copyright by M. Ray Gregg. All rights reserved.

B A II. A. Sales Price (and date) B. – Basis (Cost) (and date) C. = Gain or (Loss) We need to know the basis of the asset in order to measure the gain or loss from the sale of this asset. © Copyright by M. Ray Gregg. All rights reserved.

II. Other Information Needed?
B A III. We need to know the date the asset was acquired in order to measure the holding period. Gains and losses from assets held for a year or less are classified as short term. Gains and losses from assets held more than a year are classified as long term. III. Holding Period A. Short-term B. Long-term © Copyright by M. Ray Gregg. All rights reserved.

Which would you prefer? ST Gain I’m curious about your “tax sense” BEFORE studying this topic. I hope you have an opinion about which is better. Please respond. If you had your choice today of selling property yielding a gain, which would you prefer, a short-term gain or a long-term gain? Think. Decide. Express it. LT © Copyright by M. Ray Gregg. All rights reserved.

Which would you prefer? ST Loss If you had your choice today of selling property at a loss, how would you prefer the loss to be classified? As a short-term loss or a long-term loss? Think. Decide. Express it. LT © Copyright by M. Ray Gregg. All rights reserved.

Special Treatment of Long-Term Gains
* Special Treatment of Long-Term Gains * * 1954 1986 LTCGD Long-term gains have historically received “special tax treatment.” Generally speaking, taxpayers prefer to have LT gains (rather than ST gains). “Special tax treatment” has changed somewhat over the years. Consider this historical perspective: From 1954 to 1986, long-term capital gains were subject to the “long-term capital gain deduction” (which will be explained further in a moment). With tax rates being reduced significantly with tax reform legislation in the 80’s, Congress felt there was no longer a need for special treatment for LT gains. However, all the provisions for classification and determination of ST and LT gains and losses remained a part of the tax law; many thought someday the special provisions would be restored. From 1986 until recently the maximum tax rate on LT capital gains was 28%. Only taxpayers in higher tax brackets benefitted from the alternative tax rate. In 1997, capital gains tax rates were reduced for every marginal tax bracket. These details will be presented later. © Copyright by M. Ray Gregg. All rights reserved.

* Special Treatment of Long-Term Gains * 1954 1986 LTCGD alternate tax rate 1997 Long-term gains have historically received “special tax treatment.” Generally speaking, taxpayers prefer to have LT gains (rather than ST gains). “Special tax treatment” has changed somewhat over the years. Consider this historical perspective: From 1954 to 1986, long-term capital gains were subject to the “long-term capital gain deduction” (which will be explained further in a moment). With tax rates being reduced significantly with tax reform legislation in the 80’s, Congress felt there was no longer a need for special treatment for LT gains. However, all the provisions for classification and determination of ST and LT gains and losses remained a part of the tax law; many thought someday the special provisions would be restored. From 1986 until recently the maximum tax rate on LT capital gains was 28%. Only taxpayers in higher tax brackets benefitted from the alternative tax rate. In 1997, capital gains tax rates were reduced for every marginal tax bracket. These details will be presented later. © Copyright by M. Ray Gregg. All rights reserved.

* Special Treatment of Long-Term Gains * 1954 1986 LTCGD alternate tax rate reduced rates 1997 Long-term gains have historically received “special tax treatment.” Generally speaking, taxpayers prefer to have LT gains (rather than ST gains). “Special tax treatment” has changed somewhat over the years. Consider this historical perspective: From 1954 to 1986, long-term capital gains were subject to the “long-term capital gain deduction” (which will be explained further in a moment). With tax rates being reduced significantly with tax reform legislation in the 80’s, Congress felt there was no longer a need for special treatment for LT gains. However, all the provisions for classification and determination of ST and LT gains and losses remained a part of the tax law; many thought someday the special provisions would be restored. From 1986 until recently the maximum tax rate on LT capital gains was 28%. Only taxpayers in higher tax brackets benefitted from the alternative tax rate. In 1997, capital gains tax rates were reduced for every marginal tax bracket. These details will be presented later. © Copyright by M. Ray Gregg. All rights reserved.

* Special Treatment ’54 – ’69 ’69 – ’86 ST 100% <ST> <100%> ($1,000 annual maximum) ($3,000 annual maximum) LT 50 / 50 LTCGD / taxed 60 / 40 <LT> <50%> * © Copyright by M. Ray Gregg. All rights reserved.

* Special Treatment ’54 – ’69 ’69 – ’86 After ’86 ST 100% <ST> <100%> ($1,000 annual maximum) ($3,000 annual maximum) LT 50 / 50 LTCGD / taxed 60 / 40 <LT> <50%> © Copyright by M. Ray Gregg. All rights reserved.

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

Acquiring Property 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.

Acquiring Property 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Handout Example 1 a. 1) 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. Basis $10,000 + Gift Tax , ,000 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 a. 1) 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. Sales Price $21,000 Basis $10,000 + Gift Tax , ,000 Gain $10,000 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 a. 3) 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. Basis $10,000 + Gift Tax , ,000 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 a. 3) 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. Sales Price $ 9,000 Basis $10,000 + Gift Tax , ,000 Loss ($ 2,000) © Copyright by M. Ray Gregg. All rights reserved.

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

Handout Example 1 b. 1) 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. Basis $10,000 + Gift Tax ??? ? ? ? © Copyright by M. Ray Gregg. All rights reserved.

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

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

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

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

Handout Example 1 b. 1) 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. Basis $10,000 + Gift Tax ,500 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 b. 1) 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. Sales Price $21,000 Basis $10,000 + Gift Tax ,500 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 b. 1) 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. Sales Price $21,000 Basis $10,000 + Gift Tax ,500 Gain $10,500 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 b. 3) 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. Basis $10,000 + Gift Tax ??? ? ? ? © Copyright by M. Ray Gregg. All rights reserved.

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

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

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

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

Handout Example 1 b. 3) 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. Basis $10,000 + Gift Tax ,333 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 b. 3) 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. Sales Price $ 9,000 Basis $10,000 + Gift Tax ,333 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 b. 3) 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. Sales Price $ 9,000 Basis $10,000 + Gift Tax ,333 Loss ($ 1,333) © Copyright by M. Ray Gregg. All rights reserved.

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

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

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

Handout Example 1 a. 4) 4) 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. Basis $ ? ? ? © Copyright by M. Ray Gregg. All rights reserved.

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

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

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

Handout Example 1 a. 4) 4) 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. Basis $10,000 + Gift Tax ? ? ? ? ? ? © Copyright by M. Ray Gregg. All rights reserved.

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

Handout Example 1 a. 4) 4) 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. Sales Price $11,000 Basis for Gain $10,000 + Gift Tax ,000 Gain $ 1,000 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 a. 5) 5) 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. Basis $ ? ? ? © Copyright by M. Ray Gregg. All rights reserved.

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

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

Handout Example 1 a. 5) 5) 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. Basis for Loss $8,000 + Gift Tax ,000 © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 a. 5) 5) 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. Sales Price $7,500 Basis for Loss $8,000 + Gift Tax ,000 Loss ($ 500) © Copyright by M. Ray Gregg. All rights reserved.

Handout Example 1 a. 6) 6) 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. Sales Price $9,000 Basis $ ? ? ? © Copyright by M. Ray Gregg. All rights reserved.

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

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

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

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

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

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