As a tax practitioner, you often get people asking questions concerning the tax

Question

As a tax practitioner, you often get people asking questions concerning the tax effect of property transactions. This year is no exception. You've had individual clients ask you the following questions this year: I. I inherited property from my grandfather, and I received a gift of property from another family member. How do I determine the basis in each piece of property? II. I bought a piece of property that is used in a trade or business. Are there any tax deductions associated with this purchase of property? If so, how do I determine the amount of those deductions? Answer each of these questions, explaining the applicable rules and possibilities of each.

Explanation / Answer

Inherited property gets a stepped up basis generally equal to the fair value of the property on the date of death or the alternate valuation date as elected by the estate (2010 repeal though).

Aside from the fact that the grandfather's assets may be subject to estate tax, they may also be subject to generation skipping transfer tax. There is the repeal though for 2010 and a $1.3 million step up in basis... estates with appreciated assets over $1.3 million pass those remaining assets to heirs at their original cost basis in the hands of the decedent.

For a gift from a family member, the basis will be determined when the property is sold. If for a gain, the giver's basis originally. If a loss, the giver's basis or fair value, whichever is less.

To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.

FMV Less Than
Donor's Adjusted Basis

"If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property.

Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property .

If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property."For property used in business, you can depreciate the property (IRC 168). There is also the IRC 179 election to expense property immediately and bonus depreciation (50% up front expensing) per IRC 168(k). For the IRC 179 property, there is an annual limit ($250,000 for 2009), business income limitation, and property purchase phase-out percentage for large purchasers

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