As the upcoming tax season approaches, one question to keep in mind while you gather your tax information to file your 2006 returns is: Have you sold anything that you'll need to report the sale on your tax returns? Did you sell any investment properties such as stocks, mutual funds, land, or business/rental properties such as buildings, land, machinery, office equipment, or personal properties such as antiques, cars, jewelry, etc.? You'll need to find your cost basis and the acquisition date for items sold that need to be reported on your tax returns.
The basis, defined as "the amount of your investment in property for tax purposes" is used to figure your gain or loss on the sale, exchange, or other disposition of property. This amount is subtracted from the proceeds and thereby reduces your taxable income.
So how do you figure your basis? It depends on how you acquired your property. If you purchased the property, your basis is your original purchase price, including sales tax and shipping cost if any. The basis is then adjusted (increased or decreased) by certain items: improvements and sales expenses are added to your basis; depreciation, casualty loss deductions and certain credits are subtracted from the basis.
If you inherited a property, even though you did not pay anything for it, you may use the fair market value on the date of inheritance as your basis. This step-up basis allows considerable capital gain to escape income tax altogether. For stocks, bonds, mutual funds inherited, the value can be easily found on the Internet by searching the historical price, or with the help of your financial/tax advisor. For real properties or antique items, appraised value can be used as your basis.
If you received a property as a gift, it gets a little trickier because you would need to know the adjusted basis to the donor at the time of the gift, the fair market value when it was given to you, and if there was any gift tax paid on the gift. In most situations, the donor's basis is used as your basis. But if the value of the gift was less than the donor's basis at the time of the gift, and the gifted item was sold at a loss, you would use the fair market value on the date of the gift as your basis.
The acquisition date and the sales date determine whether any capital gain or loss was a short-term or long-term gain or loss. If you held the property more than one year, it's treated as long-term, if one year or less, it's short-term. For purchased properties, your holding period begins on the date of purchase. Inherited properties are always treated as long term regardless of how long you or the decedent held them. For gifted properties, if the donor's basis is used, the acquisition date of the donor is also used; if the fair market value is used for your basis, your acquisition date is the date of the gift. Note that the sale of business/rental properties could result in ordinary gain/loss and capital gain/loss.
In general, you must report sales for investment and business properties, whether it results in a gain or loss. For personal use properties, you must report the sale if it results in a gain. On the other hand, if the sale of a personal use property results in a loss, it's not deductible and you would not report it on your tax return. |
