Will you owe taxes when you sell that vacant land or other asset? You will if the net sales price exceeds basis.

 

But what is basis, which some people call cost basis? Accountants call it adjusted basis because over the years original basis can adjust, up or down.

 

For the nitty-gritty details on basis, see Internal Revenue Service Publication 551 or talk to a tax professional. But there are some general rules to follow:

 

Original basis of assets

 

For assets you buy, original basis is what you paid for the land, boat or work of art plus the mortgage and expenses. Consider that you buy real estate. If you pay settlement costs of $2,000, make a $20,000 down payment and take over the seller's mortgage of $100,000, your basis is $122,000.

 

For assets you inherit, original basis is the value shown on the federal estate tax return, or if the IRS increases the value, the increased value. If a return wasn't filed, basis is market value at date of death. In other words, the value of a painting on the open market when Aunt Tilly died is the basis.

 

For assets given to you, original basis is usually the donor's adjusted basis. So for an asset given to you – Uncle Bob's prize collection of Harley motorcycles, for example – the basis would usually be what Uncle Bob paid for them. The exception to that rule is complicated. Have an accountant determine basis or look at the IRS publication.

 

Adjusting basis of assets

 

For assets you improve, add cost of improvements to arrive at adjusted basis.

 

For listed stock, basis changes for various reasons: mergers, reinvesting dividends, spin – offs, dividends in stock, stock splits. Your broker or mutual fund company can help you figure adjusted basis.

 

For depreciable assets, like equipment, reduce basis for accrued depreciation. Assume you buy a tractor for $200,000. Over the years you deduct $150,000 as depreciation on your tax returns. Your adjusted basis for the tractor drops to $50,000.

 

THE MORAL: Know what you paid to know what you owe.

 

 

12-31-03