Updated July 24, 2015
Cost Basis / Investment Basis / Basis of Assets Chicago Illinois
Speaking in extreme generalities, the basis of an asset is generally what you paid for it. These computations are important when computing the gain on an asset and assessing a capital gain or capital loss for income tax or estate tax purposes. Basis concepts are some of the most complicated issues in taxation. Tax law varies by assets class and entity structure. Exceptions apply even on exceptions. Make sure get to get the advice of a competent taxation professional or call our offices at the number listed below.
To explain this concept in greater detail lets use an example. If you buy a share of stock for $5, sell it for $10, and pay a .50 cent brokerage fee on the sale, what is you basis in the stock? What you paid for it and what you paid to sell it or $5.50. Your capital gain is $4.50 per share.
Using the prior example, what if there was a two for one stock split prior to the sale of the stock and it still cost you .50 cents to sell each share of stock? Your cost per share once split is now $2.50 and the cost to sell it is .50 cents or a total basis of $3.00 per share. If sold at $10 per share your capital gain is now $7.00 per share.
Accounting for loses is most important when determining a basis because, generally speaking, one cannot deduct a loss if they didn’t pay for the loss. If you do not have basis, generally loses on capital assets are non-deductible. If you paid $5 per share of stock, sell it at $2 and pay .15cents as a brokerage fee to sell it, then what is your basis? You paid $5 and a brokerage fee of .15 cents, so your basis per share is $5.15. When you sold the stock at $2, your capital loss is $3.15. Is it deductible? Sure. You have basis. You paid $5.15 and got back $2.
If you receive an assets as part of an estate, then what is your basis in that asset? Let’s say that it is a shopping center that you inherited from a wealthy aunt. Twenty years ago, you aunt built it for a total of $250,000. Over that twenty years, as capital improvements to the property, another $250,000 was spent. Of those costs, another $300,000 has been depreciated. At the time of her death, the shopping center was appraised at $1,000,000. You paid absolutely nothing for the asset because it was inherited. What is your basis?
As the beneficiary of an estate, you receive the stepped up basis of the asset on the date of death, or a basis of $1,000,000 in the shopping center asset.
Once again, don’t try to do this yourself.
If you are having problems with your Cost Basis / Investment Basis / Basis of Assets Chicago Illinois or have issues with your accounting in general, we would love to help. I enjoy hearing from my readers, and can be contacted at
Chris@AccountingSolutionsltd.com
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Chris Amundson is the President of Accounting Solutions Ltd., a full service public accounting firm of Certified Public Accountants and Enrolled Agents handling the bookkeeping, accounting, tax preparation, and audit representation needs of Businesses, Estates, Trusts, and Upper Income Individuals.