Understanding Basis of Property for REG (CPA Exam)

In the context of taxation and business law, particularly for the CPA exam's REG section, understanding the 'basis' of property is fundamental. Basis is essentially your investment in an asset for tax purposes. It's crucial for calculating depreciation, gain or loss on sale, and other tax-related transactions.

What is Basis?

Basis represents the cost of an asset for tax purposes. It's not always the purchase price. It can be adjusted over time due to various events. The initial basis is typically the cost of the property, but it can also be determined by other means, such as inheritance or gift.

Types of Basis

Basis Type	Determination	Key Considerations
Cost Basis	Generally, the amount paid in cash, plus the fair market value of other property given, plus liabilities assumed.	Most common for purchased assets. Includes expenses incurred to acquire the asset.
Gift Basis	For assets received as a gift, the basis is generally the donor's adjusted basis. However, if the fair market value at the time of the gift is less than the donor's basis, the basis for determining loss is the fair market value.	Requires knowledge of the donor's basis and the fair market value at the time of the gift. Special rules apply for depreciation.
Inherited Basis (Stepped-Up Basis)	For assets acquired from a decedent, the basis is generally the fair market value of the property on the date of the decedent's death (or the alternate valuation date).	This 'step-up' or 'step-down' can significantly impact future gains or losses. No holding period is required to qualify for long-term capital gain treatment.
Boot Basis	When property is exchanged for other property and 'boot' (cash or other non-like-kind property) is involved, the basis of the property received is adjusted.	The basis of the property received is the basis of the property surrendered, plus any gain recognized, minus any boot received.

Adjusted Basis

The 'adjusted basis' is the initial basis that has been modified by subsequent events. These adjustments can increase or decrease the basis. Understanding these adjustments is critical for accurate tax calculations.

Think of adjusted basis as your 'current tax equity' in the asset.

Common adjustments include:

Increases: Capital improvements (e.g., adding a new room to a house), certain assessments, costs of defending title.

Decreases: Depreciation allowed or allowable, casualty losses, amortization, certain tax credits, return of capital distributions.

Basis in Like-Kind Exchanges

In a like-kind exchange (Section 1031), where business or investment property is exchanged for similar property, gain or loss is generally deferred. The basis of the new property received is determined by the basis of the property surrendered, adjusted for any boot received or given, and any gain recognized.

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Basis in Foreclosures and Repossessions

When a property is foreclosed upon or repossessed, the basis rules can become complex. For the borrower, the basis is typically reduced by any debt forgiveness. For the lender, the basis in the repossessed property is generally the amount of the debt discharged, plus any costs incurred in repossessing the property.

What is the primary purpose of understanding the basis of property for tax purposes?

To calculate gain or loss on sale, depreciation, and other tax implications of owning an asset.

Key Takeaways for REG

For the CPA REG exam, focus on the following:

Cost Basis: The default for purchased assets.

Gift Basis: Donor's basis, with FMV as a floor for losses.

Inherited Basis: Fair market value at death (stepped-up basis).

Adjusted Basis: Initial basis plus improvements, minus depreciation and losses.

Like-Kind Exchanges: Deferral of gain/loss, basis carries over with adjustments.

Visualizing the basis calculation for a purchased asset: Initial Cost + Capital Improvements - Accumulated Depreciation = Adjusted Basis. This adjusted basis is then used to calculate gain or loss upon sale (Selling Price - Adjusted Basis = Gain/Loss).

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Text-based content

Library pages focus on text content

If you inherit a stock that has appreciated significantly since the original owner purchased it, what is your tax basis in that stock?

Your tax basis is the fair market value of the stock on the date of the decedent's death (stepped-up basis).

Learning Resources

IRS Publication 551, Basis of Assets(documentation)

The official IRS guide detailing how to figure the basis of property, including various acquisition methods and adjustments.

CPA Exam REG - Basis of Property Explained(blog)

A blog post from a CPA review provider that breaks down basis concepts specifically for the CPA exam.

Tax Basis - Investopedia(wikipedia)

An accessible explanation of tax basis, its importance, and how it's calculated, with examples.

CPA Exam REG: Basis of Property | Gleim CPA Review(blog)

Another helpful blog post from a reputable CPA review course, focusing on the REG exam's treatment of property basis.

Understanding Basis in Real Estate - Nolo(blog)

Explains basis specifically for real estate, which is a common asset type tested on the REG exam.

CPA Exam REG: Basis of Property | UWorld Roger CPA Review(blog)

A concise overview of property basis for the CPA REG exam, highlighting key rules and concepts.

IRS Publication 544, Sales and Other Dispositions of Assets(documentation)

Covers the tax consequences of selling or otherwise disposing of assets, including how basis is used to calculate gain or loss.

CPA Exam REG: Basis of Property - Surgent CPA Review(blog)

A breakdown of basis rules relevant to the CPA REG exam, including common scenarios and adjustments.

Tax Basis of Property Received as a Gift(documentation)

Official legal text from Cornell's Legal Information Institute detailing the tax basis rules for gifted property.

CPA Exam REG: Basis of Property | Becker CPA(blog)

Becker's explanation of property basis, focusing on the essential elements for CPA exam success in the REG section.