CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
815/730-6250

• What is the basis of property received as a gift?
• I have investment property. Can you explain the term basis of assets?
• I sold my principal residence this year. What form do I need to file?

• If I take the exclusion of capital gain tax on the sale of my old home this year, can I also take the exclusion again if I sell my new home in the future?
• How do you report the sale of a second residence?
• When my stock split, the stock distributed to me was different than my original shares. How do I figure the basis of the shares of the two different kinds of stock?
• How do I compute the basis for stock I sold, when I received the stock over several years through a dividend reinvestment plan?
• How do I find out my cost basis for mutual funds if I do not have all of the records?
• How do I report incentive stock options on my tax return?
• How do I determine the cost basis of stock bought through an employee stock purchase plan (ESPP)?
• Does the holding period for new shares I received as a result of a stock split start on the purchase date of the original stock or on the date of the stock split?
• I buy and sell stocks as a day trader using an online brokerage firm. Can I treat this as a business and report my gains and losses on Schedule C?
• What kinds of property can be depreciated for tax purposes?

To figure the basis of property you get as a gift, you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value (FMV) at the time it was given to you. 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 loss when you dispose of the property. You basis for figuring gain is the same as the donor’s adjusted basis, plus or minus any required adjustments to basis while you held the property. Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property.

Increases to basis include but are not limited to:

1. Assessments for local improvements
2. Sales tax
3. The cost of extending utilities lines to the property
4. Legal fees such as the cost of defending or perfecting title zoning costs

Decreases to basis include but are not limited to:

1. Depreciation
2. Nontaxable corporate distributions
3. Casualty and theft losses
4. Easements
5. Rebates from the manufacturer or seller

If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain is more than $250,000 ($500,000 if married filing a joint return). This means that during the 5-year period ending on the date of the sale, you must have:

1. Owned the home for at least 2 years (the ownership test).
2. You've lived in the home as your main home for at least 2 years (the use test). If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases.

With the exception of the 2-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of your principle residence so long as you meet the ownership and use tests.

Your second home is considered a capital asset. Use Form 1040, Schedule D to report sales, exchanges, and other disposition of capital assets.

Usually, the company issuing the new type of stock will send you letter explaining the tax consequences of the stock distribution, including how to calculate the basis in the two different types of stock. Information may also be available on the company’s web site.

This means that you deem that you sold the oldest shares first, then the next oldest, then the next-to-the-next oldest, until you have accounted for the number of shares in the sale. In order to establish the basis of these shares, you need to have kept adequate documentation of all your purchases, including those that were through the dividend reinvestment plan. You may not use an average costs basis. Only mutual fund shares may have an average cost basis.

You need to reconstruct your records the best that you can. Contact your broker or the mutual fund company for assistance.

Another source of information is your prior year tax returns. If your mutual fund has been reinvesting dividends, those reinvested dividends (which have been used to purchase additional shares in the fund) should have been reported as dividend income on your tax return each year. To compute your total basis, add to the cost of the original shares purchased the amount of all dividends automatically reinvested that were previously reported as income on your prior tax returns and any shares you subsequently purchased. If you receive a distribution that is identified as a return of capital, you must reduce your total basis by that amount.

If your option is an incentive stock option, you do not include any amount in your gross income at the time the option is granted, or at the time you exercise it. However, you may have income for Alternative Minimum Tax in the year you exercise. If the special holding periods are met, any income or loss from the sale of the stock is treated as a capital gain or loss. However, if you do not meet the special holding period tests, you may have compensation income when you sell the stock.

Your starting basis is what you paid to buy the shares. This amount is increased by the compensation income amount, if any, you must declare on your income tax return when the stock is sold. Sales commissions can also increase the basis in your stock but will not affect the amount of compensation that must be declared.

The holding period of the stock you received as a result of the stock splits begins on the same day as the holding period of the original stock.

A business is generally an activity carried on for a livelihood or in good faith to make a profit. Rather than being defined in the tax code, exactly what activities are considered business activities has long been the subject of court cases. The facts and circumstances of each case determine whether or not an activity is a trade or business. Basically, if your day trading activity goal is to profit from short-term swings in the market rather than from long-term capital appreciation of investments, and is expected to be your primary income for meeting your personal living expenses, i.e. you do not have another regular job, your trading activity might be a business.

If your trading activity is a business, your trading expenses would be reported on Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A, Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, Schedule D, Capital Gains and Losses, unless you file an election to change your method of accounting.

If your trading activity is a business and you elect to change to the mark-to-market of accounting, you would report both your gains and losses on Part II of Form 4797, Sales of Business Property.

If I sell one mutual fund and use the proceeds to buy another, do I have to report the capital gains or can I wait until I sell and don’t buy another fund? Does it matter if I stay within the same family of funds?

You would have to report any capital gains realized on the sale. Even assuming this transaction meets the requirements of an exchange, rather than a sale, the exchange of shares of one fund for those of another is a taxable exchange. This is true even if both funds are within the same family of funds.

Only property used in a trade or business or in an income production activity can be depreciated. Additionally, the property must be something that wears out or becomes obsolete and it must have a determinable useful life substantially beyond the tax year. The kinds of property that can be depreciated include, but are no limited to, machinery, equipment, buildings, vehicles, and furniture. Depreciation is a complex topic.