Tax Basis

TAX BASIS WHAT IT IS & WHY IT MATTERS The tax consequences of ownership of an asset depend upon a taxpayer's basis in the asset. STEPPED-UP BASIS COST BASIS CARRY-OVER BASIS When a taxpayer buys an asset, the taxpayer is credited with basis in the asset for the amount of the purchase price, regardless of the seller's basis. When a taxpayer inherits an asset from a deceased person (in years other than 2010) the taxpayer is credited with basis in the When a taxpayer receives an asset as a gift (or when a taxpayer inherits an asset in 2010) the taxpayer is credited with the same amount of basis as the asset for the fair market value of the asset when the decedent died. person who gave the gift. $45,000 $30,000 $30,000 $30,000 $30,000 $30,000 $15,000 AN EXAMPLE GRANDFATHER'S FARM GRANDFATHER'S BASIS $50,000 John inherits a farm from his grandfather with fair market value of $200,000. His grandfather's basis was $50,000. In years other than 2010, John's basis will be "stepped up" to $200,000, the fair market value. However, in 2010, John will take a "carry- over" basis of $50,000. JOHN DOE FAIR MARKET VALUE $200,000 John is a farmer who recently accquired 3 assets: one by inhereit- ance, one by purchase, and one by gift. JOHN'S BASIS $200,000 FARM TRUCK PURCHASE PRICE $70,000 To operate his newly acquired farm, John purchases a flatbed truck for $70,000. John will take a cost basis of $70,000 in the truck. FAIR MARKET VALUE $70,000 JOHN'S BASIS $70,000 AUNT'S TRACTOR AUNT'S BASIS $15,000 To help John operate his farm, his aunt gives him her tractor in which she has $15,000 of basis but which has a fair market value of $20,000. Because this is a gift, John will take a "carry-over" basis in the tractor of $15,000, FAIR MARKET VALUE $20,000 JOHN'S BASIS $15,000 2010: IT'S DIFFERENT Because the estate tax was repealed in 2010, a taxpayer who inherits an asset from a decedent is not credited with a "stepped-up" basis in the asset; rather, the taxpayer takes a "carry-over" basis in the asset (similar to a gift). However, because the estate tax is scheduled to return in 2011, this "carry-over" basis regime on inherited assets will only apply to assets received from decedents who died in 2010. CARRY-OVER BASIS COST BASIS STEPPED-UP BASIS