Basis and holding period

Area 3: Federal Taxation of Property Transactions (5-15%)

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Topics

Cost, adjusted, and substituted basis
Holding period determination
Basis of gifted and inherited property

Lessons

Property Transactions: Basis

Study Frameworks

Property Transactions — Basis Concepts

Basis Determination

Purchased Property

Cost basis = Price + acquisition costs

Gifted Property

Gain basis: Donor's adjusted basis

Loss basis: Lower of donor's basis or FMV at date of gift

Add gift tax paid on appreciation

Inherited Property

Stepped-up basis to FMV at date of death

Alternate valuation: FMV 6 months after death

Holding period always long-term

Like-Kind Exchange (§1031)

Basis of old property

− Boot received + Boot paid

+ Gain recognized

Basis in new property

Adjusted Basis

Original Basis + Improvements − Depreciation Allowed or Allowable

Gift Basis (for gain)

Donor's Adjusted Basis + Gift Tax on Appreciation

For loss, use lower of donor's basis or FMV at gift date

MACRS Recovery Periods — Common Property Classes

Class	Property Examples	Method	Convention
3-year	Tractor units, racehorses, qualified rent-to-own property	200% DB	Half-year
5-year	Automobiles, computers, office machinery, research equipment	200% DB	Half-year
7-year	Office furniture, fixtures, agricultural structures	200% DB	Half-year
15-year	Land improvements (fences, parking lots, landscaping)	150% DB	Half-year
27.5-year	Residential rental property	Straight-line	Mid-month
39-year	Nonresidential real property (office, warehouse, store)	Straight-line	Mid-month

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