Federal Income Tax Copyright 2000 2006 by M

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

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

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

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

© Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 3

© Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 3

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

So You Sold Some Property …. . . Introduction to Capital Gains and Losses © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 4

What must we know about the asset? I. Type of asset sold A. Personal

What must we know about the asset? I. Type of asset sold A. Personal B. Business © 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

What must we know about the asset? I. Type of asset sold A. Personal -- “capital” B. Business © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 6

Capital Assets Section 2619 Capital assets include all assets held by the taxpayer except:

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) E X C E P T © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 7

What must we know about the asset? I. Type of asset sold A. B.

What must we know about the asset? I. Type of asset sold A. B. Personal -- “capital” 1. Gains and Losses 2. Gains and Losses Business © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 8

What must we know about the asset? I. Type of asset Consider an sold

What must we know about the asset? I. Type of asset Consider an sold A. Personal -- “capital” Example B. 1. Gains and Losses 2. Gains and Losses Business © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 9

What must we know about the asset? I. Type of asset sold A. B.

What must we know about the asset? I. Type of asset sold A. B. Personal -- “capital” 1. Gains and Losses 2. Gains and Losses Business © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 10

What must we know about the asset? I. Consider Type of asset sold Another

What must we know about the asset? I. Consider Type of asset sold Another A. Personal -- “capital” Example B. 1. Gains and Losses 2. Gains and Losses Business © 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

What must we know about the asset? I. Type of asset sold A. Personal -- “capital” 1. Gains and Losses 2. Losses Gains and Losses Gains but NOT B. Business © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 12

What must we know about the asset? Here’s I. Another Type of asset sold

What must we know about the asset? Here’s I. Another Type of asset sold A. B. One Personal -- “capital” 1. Gains and Losses 2. Gains and Losses Business © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 13

What must we know about the asset? I. Type of asset sold A. B.

What must we know about the asset? I. Type of asset sold A. B. Personal -- “capital” 1. Gains and Losses 2. Gains and Losses Business © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 14

What must we know about the asset? I. Type of asset sold A. B.

What must we know about the asset? I. Type of asset sold A. B. Personal -- “capital” 1. Gains and losses 2. Gains and losses Business 1. not Will Complete Later 2. 3. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 15

II. Other Information Needed? B A © Copyright 2000 - 2006 by M. Ray

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

Other Information Needed? B II. A. A Sales Price (and date) © Copyright 2000

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

Other Information Needed? Today’s Lesson B II. A. B. A Sales Price (and date)

Other Information Needed? Today’s Lesson B II. A. B. A Sales Price (and date) – Basis (Cost) (and date) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 18

Other Information Needed? B A II. A. Sales Price (and date) B. – Basis

Other Information Needed? B A II. A. Sales Price (and date) B. – Basis (Cost) (and date) C. = Gain or (Loss) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 19

Other Information Needed? B A II. A. Sales Price (and date) B. – Basis

Other Information Needed? B A II. A. Sales Price (and date) B. – Basis (Cost) (and date) C. = Gain or (Loss) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 20

II. Other Information Needed? B III. A III. Holding Period A. B. Short-term Long-term

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

Which would you prefer? ST Gain LT © Copyright 2000 - 2006 by M.

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

Which would you prefer? ST Loss LT © Copyright 2000 - 2006 by M.

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

* Special Treatment of Long-Term Gains * LTCGD 1954 * 1986 © Copyright 2000

* Special Treatment of Long-Term Gains * LTCGD 1954 * 1986 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 24

* Special Treatment of Long-Term Gains LTCGD 1954 * alternate tax rate 1986 1997

* Special Treatment of Long-Term Gains LTCGD 1954 * alternate tax rate 1986 1997 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 25

* Special Treatment of Long-Term Gains LTCGD 1954 alternate tax rate 1986 * reduced

* Special Treatment of Long-Term Gains LTCGD 1954 alternate tax rate 1986 * reduced rates 1997 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 26

Special Treatment * ’ 54 – ’ 69 ST 100% <ST> <100%> ($1, 000

Special Treatment * ’ 54 – ’ 69 ST 100% <ST> <100%> ($1, 000 annual maximum) LT <LT> © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 27

Special Treatment * ’ 54 – ’ 69 ST 100% <ST> <100%> * ($1,

Special Treatment * ’ 54 – ’ 69 ST 100% <ST> <100%> * ($1, 000 annual maximum) LT 50 / 50 LTCGD / taxed <LT> <100%> ($1, 000 annual maximum) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 28

Special Treatment * ’ 54 – ’ 69 ST 100% <ST> <100%> ($1, 000

Special Treatment * ’ 54 – ’ 69 ST 100% <ST> <100%> ($1, 000 annual maximum) LT 50 / 50 <LT> <100%> LTCGD / taxed $1, 000 ($1, 000 annual maximum) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 29

Special Treatment ’ 54 – ’ 69 – ’ 86 ST 100% <ST> <100%>

Special Treatment ’ 54 – ’ 69 – ’ 86 ST 100% <ST> <100%> ($1, 000 annual maximum) ($3, 000 annual maximum) LT * 50 / 50 LTCGD / taxed <LT> <100%> ($1, 000 annual maximum) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 30

Special Treatment ’ 54 – ’ 69 – ’ 86 ST 100% <ST> <100%>

Special Treatment ’ 54 – ’ 69 – ’ 86 ST 100% <ST> <100%> ($1, 000 annual maximum) ($3, 000 annual maximum) 50 / 50 60 / 40 LTCGD / taxed <100%> <50%> ($1, 000 annual maximum) ($3, 000 annual maximum) LT <LT> * * © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 31

Special Treatment ’ 54 – ’ 69 – ’ 86 ST 100% <ST> <100%>

Special Treatment ’ 54 – ’ 69 – ’ 86 ST 100% <ST> <100%> ($1, 000 annual maximum) ($3, 000 annual maximum) 50 / 50 60 / 40 LTCGD / taxed <100%> <50%> ($1, 000 annual maximum) ($3, 000 annual maximum) LT <LT> © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. * After ’ 86 32

Special Treatment * ’ 54 – ’ 69 – ’ 86 After ’ 86

Special Treatment * ’ 54 – ’ 69 – ’ 86 After ’ 86 ST 100% <ST> <100%> ($1, 000 annual maximum) ($3, 000 annual maximum) 50 / 50 60 / 40 100% LTCGD / taxed <100%> <50%> <100%> ($1, 000 annual maximum) ($3, 000 annual maximum) LT <LT> Alternative Tax Rate © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 33

Special Treatment of Long-Term Gains LTCGD 1954 alternate tax rate 1986 * reduced rates

Special Treatment of Long-Term Gains LTCGD 1954 alternate tax rate 1986 * reduced rates 1997 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 34

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

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

How can one acquire property? Name as many ways as you can think of.

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

 • • find it win it purchase it marry someone who owns it

• • 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 2000 - 2006 by M. Ray Gregg. All rights reserved. 37

 • • find it win it purchase it marry someone who owns it

• • 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 2000 - 2006 by M. Ray Gregg. All rights reserved. 38

 • Purchase • Gift • Inherit • Trade © Copyright 2000 - 2006

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

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? ) o ga in N No Ye s r 1 92 0 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) (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

r 3 s /1/ 13 ) Determining the Basis of Assets s Ye FMV

r 3 s /1/ 13 ) Determining the Basis of Assets s Ye FMV > donor’s be 1/ for 1/ e 77 fte Yes r 3 /1 /1 3) (a Asset acquired by purchase? donor’s adj. basis plus r 6 te af 1/7 /3 Asset acquired by purchase? 12 Y (a Ye fte es cost + capital improvements - accumulated depreciation = adjusted basis ga in ) o Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) basis for (a ss lo fte Ye s r 1 92 0 N No No adjusted basis? Federal gift tax paid (basis limited to FMV on date of gift) Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets (a fte Yes r 3 /1 /1 3) Cost

Determining the Basis of Assets (a fte Yes r 3 /1 /1 3) Cost r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 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 + Capital Improvements FMV > donor’s adjusted basis? ) o ga in N No Ye s r 1 92 0 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) basis for (a ss lo fte — Accumulated Depr Acquired FMV on date of gift (“date” basis = date of gift) by gift? (in FMV 6 months Ye s e) o N anc rit he = Adjusted Basis after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

r 3 s /1/ 13 ) Determining the Basis of Assets fte (a (a

r 3 s /1/ 13 ) Determining the Basis of Assets fte (a (a s Ye o NNo FMV > donor’s r 6 te af 1/7 /3 Asset acquired by purchase? donor’s adj. basis plus 12 Asset acquired by purchase? be 1/ for 1/ e 77 fte Yes r 3 /1 /1 3) Ye cost + capital improvements - accumulated depreciation = adjusted basis? ) Ye s r 1 92 0 o ga in N No Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) basis for (a ss lo fte Federal gift tax paid (basis limited to FMV on date of gift) Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets be 1/ for 1/ e 77 0) 92 r

Determining the Basis of Assets be 1/ for 1/ e 77 0) 92 r 1 r 6 te af 1/7 /3 FMV > donor’s s Ye donor’s adj. basis plus 12 Asset acquired by purchase? Y Yee (a ss fte (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? Ye s r 1 92 0 ) o ga in N No fte (a “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) basis for ss Acquired Fed. Gift tax x lo Acquired by Gift? Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of gift (“date” basis = date of gift) by gift? Ye s o N o LONG TERM results FMV on date of death ) ce an “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion rit 2 All dispositions yield N date elected? 1 after date of death alt. valuation he (in e) o N anc rit he (in FMV 6 months

Determining the Basis of Assets FMV > donor’s adjusted basis? be 1/ for 1/

Determining the Basis of Assets FMV > donor’s adjusted basis? be 1/ for 1/ e 77 r 6 te af 1/7 /3 s Ye donor’s adj. basis plus 12 FMV > donor’s Asset acquired by purchase? Ye (a s fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? N “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) ss lo fte Fed. Gift tax x basis for o Ye s r 1 92 0 ) o ga in N No (a Federal gift tax paid (basis limited to FMV on date of gift) Acquired FMV on date of gift (“date” basis = date of gift) by gift? (in FMV 6 months Ye s e) o N anc rit he Donor’s Basis after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

“Step into the shoes of the donor. ” © Copyright 2000 - 2006 by

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

Determining the Basis of Assets FMV > donor’s be 1/ for 1/ e 77

Determining the Basis of Assets FMV > donor’s be 1/ for 1/ e 77 r 6 te af 1/7 /3 s Ye donor’s adj. basis plus 12 Asset acquired by purchase? Ye fte s r 1 92 0) (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis ) Ye s r 1 92 0 (a (a “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) basis for ss Acquired Fed. Gift tax x lo fte o N No Acquired by Gift? ga in adjusted basis? Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) Oo c NN an “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion rit 2 o N date elected? 1 after date of death alt. valuation he (in e) o N anc rit he (in FMV 6 months FMV on date of death All dispositions yield LONG TERM results

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? ) o Ye s r 1 92 0 “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) fte (a ss lo Ye s s e) o N anc rit he (in Ye FMV on date of gift (“date” basis = date of gift) FMV 6 months after date of death All dispositions yield LONG TERM results o N alt. valuation date elected? “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion ga in N No by gift? 2 Fed. Gift tax x basis for Acquired 1 Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of death

Determining the Basis of Assets fte Yes r 3 /1 /1 3) (a s

Determining the Basis of Assets fte Yes r 3 /1 /1 3) (a s Ye FMV > donor’s r 6 te af 1/7 /3 Asset acquired by purchase? donor’s adj. basis plus 12 Inherited Property = FMV on DOD “Stepped-Up” Basis be 1/ for 1/ e 77 cost + capital improvements - accumulated depreciation = adjusted basis Ye s r 1 92 0 ) o N No total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) fte (a ss Ye s s e) o N anc rit he (in Ye FMV on date of gift (“date” basis = date of gift) FMV 6 months after date of death All dispositions yield LONG TERM results o N alt. valuation date elected? “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion “net appreciation” 1 lo by gift? 2 Fed. Gift tax x basis for Acquired 1 ga in adjusted basis? Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of death

Determining the Basis of Assets cost + capital improvements - accumulated depreciation = adjusted

Determining the Basis of Assets cost + capital improvements - accumulated depreciation = adjusted basis FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) “Step into the shoes of the donor. ” adjusted basis? ) o ga in N No Ye s r 1 92 0 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) (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? (in FMV 6 months Ye s e) o N anc rit he “Stepped-Up” Basis after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets cost + capital improvements - accumulated depreciation = adjusted

Determining the Basis of Assets cost + capital improvements - accumulated depreciation = adjusted basis FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) “Step into the shoes of the donor. ” adjusted basis? ) o ga in N No Ye s r 1 92 0 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) (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? (in FMV 6 months Ye s e) o N anc rit he “Stepped-Up” Basis after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets cost + capital improvements - accumulated depreciation = adjusted

Determining the Basis of Assets cost + capital improvements - accumulated depreciation = adjusted basis FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) “Step into the shoes of the donor. ” adjusted basis? ) o ga in N No Ye s r 1 92 0 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) (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? (in FMV 6 months Ye s e) o N anc rit he “Stepped-Up” Basis after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Grandpa, who is on his death bed, wants YOU to have his 5, 000

Grandpa, who is on his death bed, wants YOU to have his 5, 000 acre farm. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 53

Should he give it to you? Or should he change his will? © Copyright

Should he give it to you? Or should he change his will? © 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

Grandpa rec’d farm as gift from great-grandpa who had paid $1 per acre. FMV today is $500 per acre. © 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

Grandpa rec’d farm as gift from great-grandpa who had paid $1 per acre. FMV today is $500 per acre. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 56

Received As A Gift (simplified version) Sales Price $2, 500, 000 © Copyright 2000

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

Received As A Gift (simplified version) Sales Price $2, 500, 000 – Your basis

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

Received As A Gift (simplified version) Sales Price $2, 500, 000 – Your basis

Received As A Gift (simplified version) Sales Price $2, 500, 000 – Your basis © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 5, 000 59

Received As A Gift (simplified version) Sales Price $2, 500, 000 – Your basis

Received As A Gift (simplified version) Sales Price $2, 500, 000 – Your basis 5, 000 Taxable Gain $2, 495, 000 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 60

Inherited (simplified version) Sales Price $2, 500, 000 © Copyright 2000 - 2006 by

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

Inherited (simplified version) Sales Price $2, 500, 000 – Your basis © Copyright 2000

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

Inherited (simplified version) Sales Price – Your basis $2, 500, 000 © Copyright 2000

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

Inherited (simplified version) Sales Price – Your basis Taxable Gain $2, 500, 000 -0

Inherited (simplified version) Sales Price – Your basis Taxable Gain $2, 500, 000 -0 - © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 64

? ? ? ? ? Which would YOU prefer? ? ? © Copyright 2000

? ? ? ? ? Which would YOU prefer? ? ? © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 65

Inherited (simplified version) Sales Price – Your basis Taxable Gain $2, 500, 000 -0

Inherited (simplified version) Sales Price – Your basis Taxable Gain $2, 500, 000 -0 - © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 66

Determining the Basis of Assets fte Yes r 3 /1 /1 3) (a FMV

Determining the Basis of Assets fte Yes r 3 /1 /1 3) (a FMV > donor’s r 6 te af 1/7 /3 s Ye 12 ! t s e B Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 cost + capital improvements - accumulated depreciation = adjusted basis? ) o Ye s r 1 92 0 “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) fte (a ss lo Ye s s e) o N anc rit he (in Ye FMV on date of gift (“date” basis = date of gift) FMV 6 months after date of death All dispositions yield LONG TERM results o N alt. valuation date elected? “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion ga in N No by gift? 2 Fed. Gift tax x basis for Acquired 1 Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of death

Determining the Basis of Assets be 1/ for 1/ e 77 0) 92 r

Determining the Basis of Assets be 1/ for 1/ e 77 0) 92 r 1 r 6 te af 1/7 /3 FMV > donor’s s Ye donor’s adj. basis plus 12 Asset acquired by purchase? Y Yee (a ss fte (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? Ye s r 1 92 0 ) o ga in N No fte (a “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) basis for ss Acquired Fed. Gift tax x lo Acquired by Gift? Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of gift (“date” basis = date of gift) by gift? Ye s o N o LONG TERM results FMV on date of death ) ce an “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion rit 2 All dispositions yield N date elected? 1 after date of death alt. valuation he (in e) o N anc rit he (in FMV 6 months

Determining the Basis of Assets FMV > donor’s adjusted basis? be 1/ for 1/

Determining the Basis of Assets FMV > donor’s adjusted basis? be 1/ for 1/ e 77 r 6 te af 1/7 /3 s Ye donor’s adj. basis plus 12 FMV > donor’s Asset acquired by purchase? Ye (a s fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? N “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) ss lo fte Fed. Gift tax x basis for o Ye s r 1 92 0 ) o ga in N No (a Federal gift tax paid (basis limited to FMV on date of gift) Acquired FMV on date of gift (“date” basis = date of gift) by gift? (in FMV 6 months Ye s e) o N anc rit he Donor’s Basis after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets Donor’s basis “all” GT pd Basis (limited) FMV >

Determining the Basis of Assets Donor’s basis “all” GT pd Basis (limited) FMV > donor’s be 1/ for 1/ e 77 (a s Ye r 6 te af 1/7 /3 Asset acquired by purchase? donor’s adj. basis plus 12 + = fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? ) o ga in N No Ye s r 1 92 0 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) (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets Donor’s basis “all” GT pd Basis (limited) FMV >

Determining the Basis of Assets Donor’s basis “all” GT pd Basis (limited) FMV > donor’s be 1/ for 1/ e 77 (a s Ye r 6 te af 1/7 /3 Asset acquired by purchase? donor’s adj. basis plus 12 + = fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? fte alt. valuation FMV on date of gift FMV 6 months Ye s + = ss e) o N anc rit he (in after date of death All dispositions yield LONG TERM results o N “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion donor’s adjusted basis (“date” basis = donor’s date) (“date” basis = date of gift) FMV on date of death 2 total value of prop. 2 basis for date elected? 1 “net appreciation” 1 lo (a ga in Ye s r 1 92 0 ) o by gift? Fed. Gift tax x Donor’s basis “some” GT pd Basis N No Acquired Federal gift tax paid (basis limited to FMV on date of gift)

Determining the Basis of Assets Donor’s basis “all” GT pd Basis (limited) FMV >

Determining the Basis of Assets Donor’s basis “all” GT pd Basis (limited) FMV > donor’s be 1/ for 1/ e 77 (a s Ye r 6 te af 1/7 /3 Asset acquired by purchase? donor’s adj. basis plus 12 + = fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? ) o ga in N No Ye s r 1 92 0 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) Illustration (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Handout Example 1 a. 1) 1) Prior to 1977, some generous person gave you

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 + Gift Tax $10, 000 11, 000 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 73

Handout Example 1 a. 1) 1) Prior to 1977, some generous person gave you

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 Basis + Gift Tax Gain $21, 000 $10, 000 11, 000 $10, 000 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 74

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

Illustration 1. a. 3) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 75

Handout Example 1 a. 3) 3) Prior to 1977, some generous person gave you

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 + Gift Tax $10, 000 11, 000 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 76

Handout Example 1 a. 3) 3) Prior to 1977, some generous person gave you

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 Basis + Gift Tax Loss $ 9, 000 $10, 000 11, 000 ($ 2, 000) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 77

r e h n t o o i n t A tra s u

r e h n t o o i n t A tra s u l Donor’s basis l I Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? Ye s r 1 92 0 ) o fte donor’s adjusted basis (“date” basis = donor’s date) alt. valuation FMV on date of gift “some” GT pd Basis FMV 6 months Ye s (a + = ss e) o N anc rit he (in after date of death All dispositions yield LONG TERM results o N “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion total value of prop. 2 (“date” basis = date of gift) FMV on date of death 2 “net appreciation” 1 basis for date elected? 1 Fed. Gift tax x lo by gift? ga in N No Acquired Federal gift tax paid (basis limited to FMV on date of gift)

Handout Example 1 b. 1) 1) After 1976, some generous person gave you an

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 + Gift Tax $10, 000 ? ? ? © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 79

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) 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) ga in Ye s r 1 92 0 ) o No N Gift tax x “net appreciation” total value of property (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) 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) ga in Ye s r 1 92 0 ) o No N $1, 000 x “net appreciation” total value of property (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) ($20, 000 - $10, 000) total value of property Ye s r 1 92 0 ) o ga in N ss lo fte basis for (a No $1, 000 x Federal gift tax paid (basis limited to FMV on date of gift) Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Assumption For introductory purposes, assume donor gave donee other gifts totaling > $11, 000.

Assumption For introductory purposes, assume donor gave donee other gifts totaling > $11, 000. © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 83

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? (a by gift? Ye s e) o N anc rit he (in “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) ga in after date of death alt. valuation All dispositions yield date elected? LONG TERM results o N 2 total value of prop. 2 FMV 6 months FMV on date of death 1 “net appreciation” 1 = $500 ss fte Ye s r 1 92 0 ) o Acquired basis for Fed. Gift tax x lo $10, 000 $20, 000 N No $1, 000 x Federal gift tax paid (basis limited to FMV on date of gift)

Handout Example 1 b. 1) 1) After 1976, some generous person gave you an

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 + Gift Tax $10, 000 500 10, 500 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 85

Handout Example 1 b. 1) 1) After 1976, some generous person gave you an

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 Basis + Gift Tax $21, 000 $10, 000 500 10, 500 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 86

Handout Example 1 b. 1) 1) After 1976, some generous person gave you an

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 Basis + Gift Tax Gain $21, 000 $10, 000 500 10, 500 $10, 500 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 87

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

Consider Another Illustration © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 88

Handout Example 1 b. 3) 3) After 1976, some generous person gave you an

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 + Gift Tax $10, 000 ? ? ? © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 89

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) 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) ga in Ye s r 1 92 0 ) o No N Gift tax x “net appreciation” total value of property (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) 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) ga in Ye s r 1 92 0 ) o No N $1, 000 x “net appreciation” total value of property (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) $5, 000 total value of property Ye s r 1 92 0 ) o ga in N ss lo fte basis for (a No $1, 000 x Federal gift tax paid (basis limited to FMV on date of gift) Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? (a by gift? Ye s e) o N anc rit he (in “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) ga in after date of death alt. valuation All dispositions yield date elected? LONG TERM results o N 2 total value of prop. 2 FMV 6 months FMV on date of death 1 “net appreciation” 1 = $333 ss fte Ye s r 1 92 0 ) o Acquired basis for Fed. Gift tax x lo $5, 000 $15, 000 N No $1, 000 x Federal gift tax paid (basis limited to FMV on date of gift)

Handout Example 1 b. 3) 3) After 1976, some generous person gave you an

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 + Gift Tax $10, 000 333 10, 333 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 94

Handout Example 1 b. 3) 3) After 1976, some generous person gave you an

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 Basis + Gift Tax $ 9, 000 $10, 000 333 10, 333 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 95

Handout Example 1 b. 3) 3) After 1976, some generous person gave you an

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 Basis + Gift Tax Loss $ 9, 000 $10, 000 333 10, 333 ($ 1, 333) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 96

Determining the Basis of Assets FMV > donor’s adjusted basis? be 1/ for 1/

Determining the Basis of Assets FMV > donor’s adjusted basis? be 1/ for 1/ e 77 r 6 te af 1/7 /3 s Ye donor’s adj. basis plus 12 FMV > donor’s Asset acquired by purchase? Ye (a s fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis ) Ye s r 1 92 0 Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) basis for ss lo fte o (a N O NNo No ga in adjusted basis? Federal gift tax paid (basis limited to FMV on date of gift) Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Possible to Have Two Bases FMV > donor’s r 6 te af 1/7 /3

Possible to Have Two Bases FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis Ye s r 1 92 0 ) o No N ga in 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) (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) say FMVsomething - annual exclusion about $10, 000 annual exclusion

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted basis FMV > donor’s r 6 te af 1/7 /3 Donor’s Basis s Ye donor’s adj. basis plus 12 Asset acquired by purchase? Area of Gain Neither Gain nor Loss Area of Loss be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) Sales Price FMV - annual exclusion donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) after date of death alt. valuation All dispositions yield date elected? LONG TERM results o N 2 total value of prop. 2 FMV 6 months Ye s ) Ye s r 1 92 0 fte (a e) o N anc rit he (in 1 Sales Price “net appreciation” = (FMV - donor’s adjusted basis) “net appreciation” 1 basis for ss by gift? Fed. Gift tax x lo Acquired o N No Sales Price FMV ga in adjusted basis? Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of death

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

Here Are Some Illustrations © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 100

Handout Example 1 a. 4) 4) Prior to 1977, some generous person gave you

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 2000 - 2006 by M. Ray Gregg. All rights reserved. 101

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted basis Sales Price FMV > donor’s r 6 te af 1/7 /3 Donor’s Basis s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) Area of Gain Ye s r 1 92 0 ) o No N ga in adjusted basis? total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) fte (a ss lo FMV on date of gift (“date” basis = date of gift) FMV 6 months Ye s e) o N anc rit he (in after date of death alt. valuation All dispositions yield date elected? LONG TERM results o N 2 “net appreciation” 1 by gift? FMV on date of death 1 Fed. Gift tax x basis for Acquired FMV Federal gift tax paid (basis limited to FMV on date of gift) “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted basis Sales Price FMV > donor’s r 6 te af 1/7 /3 $10, 000 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) Area of Gain Ye s r 1 92 0 ) o No N ga in adjusted basis? Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) (a ss lo fte basis for Acquired $8, 000 Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted basis $11, 000 FMV > donor’s r 6 te af 1/7 /3 $10, 000 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) Area of Gain Ye s r 1 92 0 ) o No N ga in adjusted basis? Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) (a ss lo fte basis for Acquired $8, 000 Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Handout Example 1 a. 4) 4) Prior to 1977, some generous person gave you

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 + Gift Tax $10, 000 ? ? ? © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 105

Determining the Basis of Assets FMV > donor’s adjusted basis? ) o Ye s

Determining the Basis of Assets FMV > donor’s adjusted basis? ) o Ye s r 1 92 0 All or Some Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 None! ga in N No basis for donor’s adjusted basis (“date” basis = donor’s date) (a ss lo fte r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Handout Example 1 a. 4) 4) Prior to 1977, some generous person gave you

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 -010, 000 Gain $ 1, 000 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 107

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

Illustration 1. a. 5) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 108

Handout Example 1 a. 5) 5) Prior to 1977, some generous person gave you

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 2000 - 2006 by M. Ray Gregg. All rights reserved. 109

Possible to Have Two Bases FMV > donor’s r 6 te af 1/7 /3

Possible to Have Two Bases FMV > donor’s r 6 te af 1/7 /3 Donor’s Basis s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis Ye s r 1 92 0 ) o No N ga in adjusted basis? donor’s adjusted basis (“date” basis = donor’s date) fte (a ss lo FMV on date of gift Area of Loss Ye s FMV 6 months after date of death alt. valuation All dispositions yield date elected? LONG TERM results o N Sales Price “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion total value of prop. 2 (“date” basis = date of gift) e) o N anc rit he 2 “net appreciation” 1 by gift? (in 1 Fed. Gift tax x basis for Acquired FMV Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of death

Possible to Have Two Bases FMV > donor’s r 6 te af 1/7 /3

Possible to Have Two Bases FMV > donor’s r 6 te af 1/7 /3 $10, 000 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis Ye s r 1 92 0 ) o No N ga in adjusted basis? Fed. Gift tax x “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) (a ss lo fte basis for Acquired $8, 000 Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of gift (“date” basis = date of gift) by gift? FMV - annual exclusion after date of death alt. valuation All dispositions yield date elected? LONG TERM results o N 2 Ye s e) o N anc rit he (in 1 $7, 500 “net appreciation” = (FMV - donor’s adjusted basis) Area of Loss FMV 6 months FMV on date of death

Handout Example 1 a. 5) 5) Prior to 1977, some generous person gave you

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 -0 - 8, 000 © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 112

Handout Example 1 a. 5) 5) Prior to 1977, some generous person gave you

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 $8, 000 + Gift Tax -08, 000 Loss ($ 500) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 113

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

Illustration 1. a. 6) © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 114

Handout Example 1 a. 6) 6) Prior to 1977, some generous person gave you

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 Basis $9, 000 $? ? ? © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 115

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted basis Sales Price FMV > donor’s r 6 te af 1/7 /3 Donor’s Basis s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) Area of Gain fte (a ss FMV on date of gift Area of Loss Ye s FMV 6 months after date of death alt. valuation All dispositions yield date elected? LONG TERM results o N Sales Price “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion donor’s adjusted basis (“date” basis = donor’s date) (“date” basis = date of gift) e) o N anc rit he 2 total value of prop. 2 by gift? (in 1 “net appreciation” 1 basis for Acquired FMV Fed. Gift tax x lo Sales Price Ye s r 1 92 0 ) o No N ga in adjusted basis? Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of death

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted

Possible to Have Two Bases cost + capital improvements - accumulated depreciation = adjusted basis r 6 te af 1/7 /3 s Ye 12 Donor’s Basis of $10, 000 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) Area of Gain ga in ) o N “net appreciation” 1 total value of prop. 2 donor’s adjusted basis (“date” basis = donor’s date) ss lo fte basis for (a No Ye s r 1 92 0 Fed. Gift tax x Yields a LOSS! FMV > donor’s adjusted basis? Sales Price of $9, 000 Acquired Federal gift tax paid (basis limited to FMV on date of gift) FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Possible to Have Two Bases Federal gift tax paid (basis limited to FMV on

Possible to Have Two Bases Federal gift tax paid (basis limited to FMV on date of gift) Fed. Gift tax x “net appreciation” 1 total value of prop. 2 Therefore Yields a GAIN! ga in adjusted basis? Ye s r 1 92 0 ) o N fte ss lo Acquired FMV of $8, 000 donor’s adjusted basis (“date” basis = donor’s date) basis for (a No Sales Price of $9, 000 FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in Area of Loss FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion

Possible to Have Two Bases FMV > donor’s adjusted basis (“date” basis = donor’s

Possible to Have Two Bases FMV > donor’s adjusted basis (“date” basis = donor’s date) FMV on date of gift (“date” basis = date of gift) after date of death alt. valuation All dispositions yield date elected? LONG TERM results o N “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion total value of prop. 2 FMV 6 months Ye s ) Ye s r 1 92 0 fte (a ss e) o N anc rit he (in 2 “net appreciation” 1 basis for FMV on date of death 1 Fed. Gift tax x lo by gift? o N No Acquired FMV ga in adjusted basis? Sales Price Federal gift tax paid (basis limited to FMV on date of gift) Neither Gain nor Loss r 6 te af 1/7 /3 Donor’s Basis s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis

Answers for b. 4 - 6 (after 1976) would be the same as for

Answers for b. 4 - 6 (after 1976) would be the same as for part a. since no gift tax added More of Handout © Copyright 2000 - 2006 by M. Ray Gregg. All rights reserved. 120

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3

Determining the Basis of Assets FMV > donor’s r 6 te af 1/7 /3 s Ye 12 Asset acquired by purchase? donor’s adj. basis plus be 1/ for 1/ e 77 (a fte Yes r 3 /1 /1 3) cost + capital improvements - accumulated depreciation = adjusted basis? ) o ga in N No Ye s r 1 92 0 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) (a ss lo fte basis for Acquired FMV on date of gift (“date” basis = date of gift) by gift? Ye s e) o N anc rit he (in FMV 6 months after date of death All dispositions yield date elected? LONG TERM results o N alt. valuation FMV on date of death 1 2 “net appreciation” = (FMV - donor’s adjusted basis) FMV - annual exclusion