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In
determining any amount you might gain or lose on the sale of an item, it
will be necessary to maintain a basic formula: the amount realized less the
adjusted basis of the asset sold gives you the gain or the loss. Let’s
determine the calculation of both the amount realized and the adjusted basis
of the asset.
The
amount realized will include:
-
Cash
received
-
Cancellation
of debt
-
Property
received at fair market value, and
-
Services
received at fair market value
The
adjusted basis of the asset sold will depend on whether the asset was first
purchased, gifted, or inherited:
For
purchased property, the basis of the property will be its cost. This amount
will then be increased for any capital improvements, and decreased for any
accumulated depreciation.
For
gifted property, the general rule for basis is to take the donor’s basis
as your own. However, if at the date of gifting the fair market value is
less than the cost basis from the donor, the donee’s basis will be
determined by the future selling price as explained below.
If
the future selling price is greater than the cost basis of the donor, the
cost basis will be used to determine the amount of gain. If the future
selling price is less than the lower fair market value, than the lower fair
market value will be used to determine the amount of your loss. And if the
future selling price is between the donor’s cost basis and the fair market
value, than you will report neither a gain nor loss. The basis will be
whatever the selling price was.
Lastly,
if you inherited the property, the general rule says that the fair market
value at the date of death becomes your basis. But, this can be changed by
electing an alternate valuation date. If an executor validly elects to use
an alternate date, the fair market value will be used at the earlier of: (1)
the distribution date of the asset, or (2) an alternate valuation date no
later than six months after death. This method may only be used if it lowers
the entire gross estate and estate tax.
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