Basis is one of the simplest, and also most complex, areas of accounting and tax preparation for many CPA firms. Clients truly need to understand the principles underlying this concept in order to participate in recordkeeping and property management. However, few really get it. Part of the problem is a communication issue between professionals and laymen. When accountants talk in jargon or use industry-specific words, our clients hear something similar to the Whomp-whomp-whomp that Charlie Brown heard when adults spoke to him. The following information is what your clients need to understand about this tax concept.
The Basics of Basis
For tax purposes, the basis of a property is its value at the time that it is transferred. This base value will change over time. Because changes in its basis affect one's taxes, it is important to determine the basis at the moment that the property changes hands.
In most cases, the basis of a property is its fair market value, or FMV. If a property was purchased, the sales price can be used. If a property is inherited, the basis of the property on the day the former owner died is most commonly used. However, people can use other calculations such as the basis on the day they formally received ownership or the date of alternative valuation (six months after the death or transfer of property). If property is given as a gift, the basis is generally the one formerly claimed by the giver or the fair market value, whichever is less.
In most cases, it is better for tax purposes if the basis is smaller. There are rare exceptions, which is why it is important to have this discussion immediately after a client acquires new property, or preferably before.
Changes in Basis and Tax Implications
The changes in basis of a property or holding generally reflect changes in its value. However, this a broad generality. In general, improvements to a property will increase the basis, although they can instead decrease it if tax credits are used. selling an easement or other access to the property also decreases the basis. Last, depreciation is the most common way for the tax basis to decrease. This depreciation can be a significant write-off in some cases, so it is important to explain how depreciation may affect your clients' tax picture. In addition, it is important to explain that tax basis can never fall below zero.
In general, losses and expenses decrease value while improvements increase value. The particulars, however, vary widely.
Tax Basis in Property Transfers
Transferring property can affect basis immensely. As discussed before, it often decreases the basis, as either the giver's claimed basis or the fair market value can be used. There are individual cases where this is not true, and your client should understand any of these that apply to him or her. In a tax-free §1031 exchange, for example, the basis will be adjusted to reflect any other property or cash that was part of the exchange.
Clients do not need to understand every detail of this legal principle. In most cases, the basics will be enough. After all, this is why they seek accounting professionals. If you feel over your head in a complicated case involving basis, you can refer to other Boca Raton CPA firms.
Gary Kaplan’s desire for excellence shows in his training, experience and service he provides as a top rated Boca Raton CPA. He completed his undergraduate degree at Nova Southeastern University. He went on to earn both his Masters in Accounting at Nova Southeastern University and his Masters in the Science of Taxation at Florida International University. Gary has been practicing as a Certified Public Accountant since 1997, attaining his expertise in all aspects of accounting, business and personal tax and strategic planning. He listens to each client and helps them achieve their own, unique goals. Gary values educating others and giving back to his community: he has served as an Adjunct Professor of Accounting at Florida Atlantic University, and gives accounting presentations at St. Thomas University School of Law. In 2013, Gary Kaplan received his certification for retirement planning and is now a Certified Specialist in Retirement Planning™ (CSRP).
Gary is licensed to practice in Florida, Maryland, Utah, New York and Washington D.C. He has gained a reputation as a professional who provides quality work, value and personal attention to his clients.