1. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 1 Federal Income Tax

2. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 2

3. 3

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

5. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 5 What must we know about the asset? I. Type of asset sold A.Personal B.Business

6. © Copyright 2000 - 2006 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

7. © Copyright 2000 - 2006 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

8. © Copyright 2000 - 2006 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

9. © Copyright 2000 - 2006 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

10. © Copyright 2000 - 2006 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

11. © Copyright 2000 - 2006 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

12. © Copyright 2000 - 2006 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

13. © Copyright 2000 - 2006 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

14. © Copyright 2000 - 2006 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

15. © Copyright 2000 - 2006 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 1. 2. 3. Will Complete Later not

16. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 16 II. Other Information Needed? BA

17. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 17 Other Information Needed? BA A.Sales Price (and date)II.

18. © Copyright 2000 - 2006 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

19. © Copyright 2000 - 2006 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.

20. © Copyright 2000 - 2006 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.

21. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 21 II. Other Information Needed? BA III. III.Holding Period A.Short-term B.Long-term

22. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 22 Which would you prefer? Gain ST LT

23. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 23 Which would you prefer? Loss ST LT

24. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 24 Special Treatment of Long-Term Gains 19541986 LTCGD * * *

25. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 25 Special Treatment of Long-Term Gains 19541986 1997 LTCGDalternate tax rate * *

26. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 26 Special Treatment of Long-Term Gains 19541986 1997 LTCGDalternate tax rate reduced rates * *

27. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 27 Special Treatment ’54 – ’69 ST100% ($1,000 annual maximum) LT *

28. © Copyright 2000 - 2006 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) * *

29. © Copyright 2000 - 2006 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

30. © Copyright 2000 - 2006 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) *

31. © Copyright 2000 - 2006 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) * *

32. © Copyright 2000 - 2006 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) *

33. © Copyright 2000 - 2006 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 *

34. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 34 Special Treatment of Long-Term Gains 19541986 1997 LTCGDalternate tax rate reduced rates *

35. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 35

36. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 36 How can one acquire property? Name as many ways as you can think of. Be creative!

37. © Copyright 2000 - 2006 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

38. © Copyright 2000 - 2006 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

39. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 39 Purchase Gift Inherit Trade Later

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 46 “Step into the shoes of the donor.”

47. 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

48. 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

49. 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

50. 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.”

51. 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.”

52. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 52 Grandpa, who is on his death bed, wants YOU to have his 5,000 acre farm.

53. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 53 Should he give it to you? Or should he change his will?

54. © Copyright 2000 - 2006 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.

55. © Copyright 2000 - 2006 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.

56. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 56 Received As A Gift (simplified version) Sales Price$2,500,000

57. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 57 Received As A Gift (simplified version) Sales Price$2,500,000 –Your basis ? ? ?

58. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 58 Received As A Gift (simplified version) Sales Price$2,500,000 –Your basis 5,000

59. © Copyright 2000 - 2006 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

60. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 60 Inherited (simplified version) Sales Price$2,500,000

61. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 61 Inherited (simplified version) Sales Price$2,500,000 –Your basis ? ? ?

62. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 62 Inherited (simplified version) Sales Price$2,500,000 –Your basis 2,500,000

63. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 63 Inherited (simplified version) Sales Price$2,500,000 –Your basis 2,500,000 Taxable Gain -0-

64. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 64 Which would YOU prefer? ??? ???. ???

65. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 65 Inherited (simplified version) Sales Price$2,500,000 –Your basis 2,500,000 Taxable Gain -0-

66. 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

67. 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

68. 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

69. 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

70. 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

71. 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

72. © Copyright 2000 - 2006 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

73. © Copyright 2000 - 2006 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

74. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 74 Illustration 1. a. 3)

75. © Copyright 2000 - 2006 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

76. © Copyright 2000 - 2006 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)

77. 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

78. © Copyright 2000 - 2006 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 ??? ? ? ?

79. 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

80. 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

81. 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

82. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 82 Assumption For introductory purposes, assume donor gave donee other gifts totaling > $11,000.

83. 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

84. © Copyright 2000 - 2006 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 10,500

85. © Copyright 2000 - 2006 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 10,500

86. © Copyright 2000 - 2006 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 10,500 Gain $10,500

87. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 87 Consider Another Illustration

88. © Copyright 2000 - 2006 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 ??? ? ? ?

89. 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

90. 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

91. 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

92. 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

93. © Copyright 2000 - 2006 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 10,333

94. © Copyright 2000 - 2006 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 10,333

95. © Copyright 2000 - 2006 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 $10,000 + Gift Tax 333 10,333 Loss ($ 1,333)

96. 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

97. 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

98. 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

99. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 99 Here Are Some Illustrations

100. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 100 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. Handout Example 1 a. 4) Basis $ ? ? ?

101. 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

102. 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

103. 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

104. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 104 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. Handout Example 1 a. 4) Basis $10,000 + Gift Tax ? ? ? ? ? ?

105. 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

106. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 106 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. Handout Example 1 a. 4) Sales Price$11,000 Basis for Gain $10,000 + Gift Tax -0- 10,000 Gain $ 1,000

107. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 107 Illustration 1. a. 5)

108. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 108 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. Handout Example 1 a. 5) Basis $ ? ? ?

109. 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

110. 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

111. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 111 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. Handout Example 1 a. 5) Basis for Loss $8,000 + Gift Tax -0- 8,000

112. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 112 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. Handout Example 1 a. 5) Sales Price $7,500 Basis for Loss $8,000 + Gift Tax -0- 8,000 Loss ($ 500)

113. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 113 Illustration 1. a. 6)

114. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 114 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. Handout Example 1 a. 6) Sales Price$9,000 Basis $ ? ? ?

115. 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

116. 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!

117. 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

118. 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

119. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 119 Answers for b. 4 - 6 (after 1976) would be the same as for part a. since no gift tax added More of Handout

120. 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