Carryover basis
Encyclopedia
Carryover basis occurs when a property transfer also results in a transfer of the transferor's basis
in the property. The transferor's basis in the property "carries over" to the transferee.
gifts and transfers in trust
. Generally, a taxpayer's basis
in property is the cost to acquire the property. However, there is an exception for inter vivos gifts and transfers in trust. For gifts, to calculate a gain, the donee has the same basis in the property as the donor's adjusted basis
in the property. The same rule applies for calculating a loss, unless the donor's adjusted basis is greater than the fair market value
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.
(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.
, the concept of carryover basis is prevalent in the formation of a business.
In partnership taxation, carryover basis occurs when a partner contributes capital to the partnership in exchange for a partnership interest. The partnership's basis in the contributed capital asset will be the same as the basis of the partner who contributed the asset.
In corporate taxation
, 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.
Cost basis
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/ taxes on a capital gain/ that equals the amount realized on the sale minus the sold property's basis.The taxpayer deserves a tax-free...
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 vivosInter vivos
Inter vivos is a legal term referring to a transfer or gift made during one's lifetime, as opposed to a testamentary transfer ....
gifts and transfers in trust
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
. Generally, a taxpayer's basis
Cost basis
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/ taxes on a capital gain/ that equals the amount realized on the sale minus the sold property's basis.The taxpayer deserves a tax-free...
in property is the cost to acquire the property. However, there is an exception for inter vivos gifts and transfers in trust. For gifts, to calculate a gain, the donee has the same basis in the property as the donor's adjusted basis
Adjusted basis
In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items.Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes...
in the property. The same rule applies for calculating a loss, unless the donor's adjusted basis is greater than the fair market value
Fair market value
Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...
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.
An 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 lawTax law
Tax law is the codified system of laws that describes government levies on economic transactions, commonly called taxes.-Major issues:Primary taxation issues facing the governments world over include;* taxes on income and wealth...
, the concept of carryover basis is prevalent in the formation of a business.
In partnership taxation, carryover basis occurs when a partner contributes capital to the partnership in exchange for a partnership interest. The partnership's basis in the contributed capital asset will be the same as the basis of the partner who contributed the asset.
In corporate taxation
Corporate tax in the United States
Corporate tax is imposed in the United States at the Federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Federal tax rates on corporate taxable income vary from 15% to 35%. State and local taxes and rules vary by jurisdiction, though many...
, 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.