What is my Cost Basis?

What is my cost basis in certain property and why do I care?  Many people and businesses are not fully aware of their basis in property, do not properly track the basis and may be unaware as to the importance of their basis in property.  The article below has been prepared by a tax attorney to provide information regarding basis.  Please remember, this is not legal advice and it is recommended you consult directly with your tax attorney regarding your specific issues and questions.

You could look at your cost basis as your initial threshold for gain or loss when an asset or property is sold.  Although, not discussed in this article, under certain circumstances you may not be able to recognize a loss, and you may not have recognize gain.  Further, your basis may be adjusted because of certain issues.  Regardless, to calculate basis, you would start with your cost basis.  Generally, the basis of your property is the cost.  You would likely determine cost by the amount of cash paid, debt obligations (loan or promissory note) and other property transferred.  However, it is very important to remember that your cost basis may also include:

  • Freight/shipping
  • Installation and testing
  • Sales Tax
  • Legal and accounting fees
  • Excise Taxes
  • Recording Fees
  • Real estate taxes

For example, say you decide to purchase a piece of equipment for $100,000.  The shipping fee was $2,500 and you paid an attorney $1,000 to draft the bill of sale and related purchase documents.  Your cost basis would thus be $103,500.  Thus, if you sold the equipment immediately thereafter, your threshold for any gain would be $103,500.  If you held the equipment for business use, and depreciated the equipment, this depreciation would lower the cost basis and you would track the adjusted basis of the property.

 

Often when a business is purchased, you purchase all assets and the assets differ.  Thus, how do you report or track the cost basis in the purchase of a business?  When you purchase business assets, you can report the amount paid for each class of assets on Form 8594.  The IRS allocates purchase price in an asset sale between seven classes of assets, which are outlined on the Form 8594 and defined in the instructions and elsewhere.  The business selling the assets would report the sale of the assets on Form 4797 (Sales of Business Property).  Generally, the seller and buyer involved in the asset purchase will agree to the allocation of the purchase price and Form 8594 will be agreed upon and completed prior to closing, perhaps even as an exhibit to the asset purchase agreement.

 

If you have questions relating to your basis in property and tax treatment through the sale or purchase of property, you may want to speak with a tax attorney and/or business attorney.  You can contact The McGuire Law Firm at 720-833-7705 with any questions.

Denver Tax Lawyer