1. Acquisitions of Property
Chapter 9
Acquisitions of Property
Kevin Murphy
Mark Higgins
©2007 South-Western 1

2. Preview of Coming Attractions
Chapter 9 begins four chapters dealing with property
Acquisition (Chapter 9)
Depreciation (Chapter 10)
Disposition (Chapter 11)
Special Issues (Chapter 12)

3. Tax Definition of Property
The term property refers to long-lived assets owned by a taxpayer.
The amount invested in an asset is the property’s basis.

4. Concept Review
Under the capital recovery concept, a property’s basis may be recovered before any taxable income is realized from disposal of property.

5. Property is classified by both its use and its type.
Classes of Property
Property is classified by both its use and its type.

6. Use of Property Property is used for
Trade or business,
Production of income (investment), or
Personal purposes
The same property may be used differently by different taxpayers

7. Types of Property
All property may be classified by type as either tangible or intangible
Intangible property lacks physical substance and has only an economic existence
Tangible property has physical substance
Tangible real property (realty) consists of land and structures permanently attached to land
Tangible personal property (personalty) is all other tangible property 5

8. Property Investment Cycle
Period of Use
Property
Acquisition
Property
Disposition
plus
additional
capital
minus capital
recoveries
Adjusted
Basis
Initial
Basis

9. Increases in Basis There are two broad categories of increases
Additional capital investments
Capital expenditures
Costs of defending ownership
Special assessments
Reinvestment of income from the property
Taxable income from conduit entities

10. Decreases in Basis There are three broad categories of decreases
Annual tax deductions for cost recovery
Depreciation, depletion or amortization
Losses from conduit entities
Disposition of all or part of the property
Capital recovery due to income exclusion

11. Basis in Conduit Entities
Basis in a conduit entity is adjusted yearly for items passed through to owners
Increased for additional capital invested, taxable and nontaxable income, and owner’s share of entity liabilities
Decreased for deductible or nondeductible expenses, cash or property distributed to the owner, and owner’s share of liability reductions

12. Property Dispositions
Amount Realized
minus: Adjusted Basis
Realized
Gain
Realized
Loss
Recognized
Gain
Recognized
Loss

13. Initial Basis Amount invested = Cash paid,
+ FMV of property or services given
+ Increases in liabilities related to the purchase
+ Any cost incurred to get the asset ready for its intended use

14. Basis in Bargain Purchase
The all-inclusive income concept requires income recognition equal to the difference between an asset’s FMV and its sales price
The asset’s basis = amount paid plus the amount of income recognized

15. Purchase of Multiple Assets
Total basis is allocated between assets based on the relative FMV of each

16. Purchase of Assets of a Business
Purchase price is allocated to individual assets by their FMVs or through specific agreement
Excess of purchase price over FMV of assets is considered Goodwill
Purchase of corporate stock does not confer ownership of the business’ assets

17. Basis in Constructed Assets
Basis includes
Direct construction costs
Actual costs of physical construction
Indirect construction costs
General costs of the business that support the construction
For example: interest, taxes, equipment depreciation, general admin., etc.

18. Basis of Property Acquired by Gift
On the date of gift, compare FMV of property to the donor’s basis.
If FMV > donor’s basis
Basis in the property is the donor’s basis plus any gift tax paid on net appreciation

19. Basis of Property Acquired by Gift (continued)
If Donor’s basis > FMV
Basis is determined when property is eventually sold
If sold for more than donor’s basis, use donor’s basis (gain)
If sold for less than FMV, use FMV as basis (loss)
If sold for an amount between the two, use sales price as basis (no gain or loss)

20. Holding Period for Property Acquired by Gift
If donor’s basis is used, holding period carry’s over and begins on the donor’s acquisition date
If FMV is used, holding period begins on the date of gift

21. Basis of Property Acquired by Inheritance
Three dates are important
Primary valuation date is the date of death
Alternate valuation date is six months after the date of death
Distribution date is the date a beneficiary receives the property

22. Basis of Property Acquired by Inheritance (continued)
Basis is generally the FMV of the property on the primary valuation date
If the estate is valued on the alternate valuation date
Basis is the FMV of the property on the earliest date received, either
Date of distribution, or
Alternate valuation date

23. Holding Period of Property Acquired by Inheritance
The holding period for property acquired by inheritance is automatically
long term.

24. Basis in Property Converted From Personal to Business Use
On the date of conversion, compare the asset’s personal-use basis to its FMV.
If FMV > personal basis
Personal basis is used for depreciation and gain or loss calculations

25. Basis in Property Converted From Personal to Business Use
If Personal basis > FMV
Use FMV for depreciation
Basis for sale is determined when the property is sold
If sold for > personal basis, use personal basis: (gain)
If sold for < FMV, use FMV: (loss)
If sold for an amount between the two, no gain or loss is recognized

26. Basis in Securities Stock Dividends
Stock dividends are generally non-taxable dividends.
Basis per share = Original cost
Total shares held after dividend
Stock dividends become taxable when taxpayers may receive cash instead of shares. Income = FMV of stock at distribution.

27. Basis in Securities Wash Sales
A wash sale occurs when a security sold at a loss is replaced with a substantially similar security +/- 30 days from the sale.
Loss is not deductible under the substance-over-form doctrine
Nondeductible loss amount is added to the basis of the replacement security

28. End of Chapter 9