Selling Assets: Tips For Calculating Tax Basis

captial gains, inheritence

Figuring out your tax basis when selling assets can be tricky because some transactions fall under guidelines defined under the IRS's Publication 551 while others fall under Publication 4895 guidelines.

In some cases, the sale of assets may fall under Publication 550 tax categories.

With that in mind, here are some tips for calculating your tax basis.

An Overview of Tax Basis

According to the IRS, your tax basis is simply the capital used to acquire assets.

This basis also forms the foundation of amortization, depreciation, capital gains/losses, and casualty loss calculations.

Take note the IRS's definition of capital costs includes all expenses related to asset purchases including recording fees, sales taxes, freight fees, excise taxes, and revenue stamps.

Real Estate

If you are selling property, your tax basis consists of settlement and closing expenses such as legal fees, transfer taxes, abstract fees, utility service charges, survey fees, and recording fees.

This is in addition to property improvement charges, back taxes/interest, and mortgage fees (where applicable).

Settlement/closing costs that you cannot include in your tax basis include mortgage refinancing fees, casualty insurance premiums, loan assumption fees, credit report expenses, loan origination fees, and utility charges incurred before closing a property sale.

Intangible Assets

The tax basis for intangible assets like intellectual property -- trademarks, franchises, patents, copyrights, trade names, and goodwill -- is the cost of creating or acquiring it.

For patents, the basis should include research and development costs.

This is in addition to legal fees associated with patent application.

The only cost you cannot include is the value of time spent developing an invention, trademark, or brand.

If you acquire multiple IP assets at the same time, your tax basis will be the total cost incurred.

Stocks and Bonds

In general, the basis for tradable assets like stocks and bonds is the purchase price inclusive of transactional fees.

However, this does not apply to stock/bond assets acquired in transactions other than purchase.

In this case, fair market value (FMV) is used to determine your tax basis.

In cases where you cannot account for all securities traded, the standard practice is to use the basis applicable to the first assets you ever traded.

The basis for shares bought from mutual funds is the average applicable to all transactions recorded during the period under consideration -- financial/tax year.

It is worth noting that your cost basis will rise if you use dividends to acquire more shares.

Even if you fail to include them in your tax basis, dividends attract their own separate tax meaning you will end up settling with the IRS either way.

Finally, the basis for inherited stocks/bonds is the market value recorded on the day the decedent died.

Since the regulations applicable to tradable assets are quite wide, it is advisable to consult an expert if you have doubts.

Conclusion

When evaluating investments, your tax basis will vary depending on factors such as the type of asset, nature of acquisition, as well as the applicable transactional costs.

Nevertheless, your tax basis will be the cost of acquiring tangible or intangible assets.

For assets acquired via inheritance, the fair market value will form your tax basis.

If in doubt, consult a tax professional.

About the author
Margaretha Valderas