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FINANCE
ABOUT BASIS
by Michael Wiener, E.A. This capital The unadjusted basis
investment is or original basis in certain
T he tax consequences of many personal and business further defined circumstances will be
transactions attributable to the taxpayer are as being either determined by Fair Market
determined in whole or in part by the taxpayer's Value or transferred value.
basis in the property. So then, what is basis? unadjusted For example, the basis of
basis or inherited property is largely
A taxpayer's basis in determined by the fair
property represents the capital adjusted basis. market value and the date of
investment that has not been passing of the decedent.
recovered through some
provision in the tax code. SO WHY IS ADJUSTED BASIS IMPORTANT?
The (tax) basis is important
to property transactions The adjusted basis of a taxpayer's property is the largest
determining gain or loss single factor in the computation of gain or loss when the
when the property sold or property is disposed of. It is also critical in determining
exchanged, the investment the recognition of losses. This applies to real property,
that may be recovered thru investments, personal and business property. Being aware
deductions, limitations for certain loss deductions, and of how and what factors affect the basis will in large part
determines the basis in the hands of a subsequent taxpayer determine how much tax you will pay.
in a non-taxable exchange.
This capital investment is further defined as being If you should have a topic that you would like me to
either unadjusted basis or adjusted basis. The unadjusted discuss or if you should have a question, please feel
basis in property is the cost of the property at the time of
acquisition by the taxpayer and includes cash transferred, free to call 239.403.4410 or e-mail me at
mortgages assumed, costs to complete the transaction and michael@mwtaxandaccounting.com.
costs incurred in acquiring or producing the property.
The adjusted basis then is the original basis in An enrolled agent, licensed by the US Department
the property increased or decreased to reflect capital of the Treasury to represent taxpayers before the
expenditures, recovery costs (i.e. depreciation), and IRS for audits, collections and appeals. To attain
other gains and losses recognized while the property the enrolled agent designation, candidates must
is being held. demonstrate expertise in taxation, fulfill
To illustrate. In 2014 Joe purchases an automobile for continuing education credits and adhere to a
$10,000. Since he uses this in his business, in 2015 and stringent code of ethics.
2016 he depreciates (expenses) the car $2,000 per year. At
the end of 2016, Joe's unadjusted basis is $10,000 and his
adjusted basis is $6,000 ($10,000 less $4,000.)
74 Life in Naples | November 2016
