Carryover basis occurs when a property transfer also results in a transfer of the transferor's
basis
Basis may refer to:
Finance and accounting
* Adjusted basis, the net cost of an asset after adjusting for various tax-related items
*Basis point, 0.01%, often used in the context of interest rates
* Basis trading, a trading strategy consisting ...
in the property. The transferor's basis in the property "carries over" to the transferee.
Tax law of United States of America
Carryover basis, also referred to as a ''transferred basis'', applies to
inter vivos
Inter vivos (Latin, ''between the living'') is a legal term referring to a transfer or gift made during one's lifetime, as opposed to a testamentary transfer that takes effect on the death of the giver.
The term is often used to describe a trust e ...
gifts and transfers in
trust
Trust often refers to:
* Trust (social science), confidence in or dependence on a person or quality
It may also refer to:
Business and law
* Trust law, a body of law under which one person holds property for the benefit of another
* Trust (bus ...
.
[IRC § 1015](_blank)
/ref> Generally, a taxpayer's basis
Basis may refer to:
Finance and accounting
* Adjusted basis, the net cost of an asset after adjusting for various tax-related items
*Basis point, 0.01%, often used in the context of interest rates
* Basis trading, a trading strategy consisting ...
in property is the cost to acquire the property. However, there is an exception for inter vivos gifts and transfers in trust.adjusted basis In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items.
Adjusted Basis or Adjusted Tax Basis refers to the original cost or other basis of property, reduced by depreciation deductions and increas ...
in the property. The same rule applies for calculating a loss, unless the donor's adjusted basis is greater than the fair market value
The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by sever ...
of the property at the time of the gift. In this case, the loss does not carry over and the basis is the fair market value of the property at the time of the gift.
Example
In 1998, Mother purchased a lamp for $20. In 2000, Mother gifted the lamp to Daughter. At the time of the gift, the lamp's fair market value was $10. In 2002, Daughter sells the lamp to John.
(a) Daughter sells the lamp for $38. For the purpose of determining gain, Daughter uses Mother's carryover basis ($20). Thus, Daughter realizes an $18 gain in the sale to John.
(b) Daughter sells the lamp for $8. For the purpose of determining loss, Daughter uses the fair market value of the property at the time of the gift ($10). Thus, she realizes a $2 loss in the sale to John.
(c) Daughter sells the lamp for $15. For the purpose of determining gain, she uses Mother's basis of $20. Thus, there is no gain. But there is no loss either; for the purpose of determining loss, Daughter uses the fair market value of the property at the time of the gift ($10). Thus, Daughter realizes neither a gain nor a loss in the sale to John.
Carryover Basis in Related Disciplines
In tax law
Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules and procedures (laws) to assess and collect taxes in a ...
, the concept of carryover basis is prevalent in the formation of a business.
In partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments o ...
taxation, carryover basis occurs when a partner contributes capital to the partnership in exchange for a partnership interest.[26 USCA 721] The partnership's basis in the contributed capital asset will be the same as the basis of the partner who contributed the asset.corporate taxation
A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed a ...
, carryover basis occurs when a person contributes a capital asset to a newly formed corporation controlled by the transferor or to an existing corporation in which the transferor gains control. The corporation's basis in the asset then is the same as the transferor's.[26 USCA 351]
See also
*Cost basis
Basis (or cost basis), as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/(saves) taxes on a capital gain/(loss) that equals the amount realized ...
*Tax accounting
U.S. tax accounting refers to accounting for tax purposes in the United States. Unlike most countries, the United States has a comprehensive set of accounting principles for tax purposes, prescribed by tax law, which are separate and distinct from ...
References
Taxation in the United States