Understanding Basis and Why it is important to you and your Family?

Basis – Noun

The underlying support or foundation for an idea, argument, or process.

Basis has its roots or foundation in our fundamental family assets of how they are taxed by the Federal Government. For Example, if John gifts his secondary home to his daughter Julia, the home will be given to Julia but at the same basis that John originally purchased the home. John bought his Santa Rosa, California home for 200K in 1981 and gifted it to Julia in 2010. Julia receives the home but also receives the same basis of 200K. Julia sell’s the home in 2017 for 600K. Julia’s CPA does her 2017 return and informs her that she owes capital gains on the sell of the home. Capital Gain is computed by taking the sell price and reducing it by the basis or 600K minus 200K or 400K.  Julia receives a 250K exemption reducing the gain to 150K. The capital gain tax is 20 Percent and Julia will now have an additional tax of 30K on her 2017 return.

Could this tax be avoided?

The Basis of an Asset can also be transferred at Death. At Death the basis of an asset is the transferable amount at the time of the Donor’s death. For Example, If John passes away in 2016 and transfers the same Santa Rosa Home  to his daughter through a revocable trust the basis will be based on his date of death not when he originally purchased the home. Thus instead of a 200K basis from 1981, Julia gets a date of death step up in basis to 2016 or 550K. Now when she sells the home for 600K, her exemption covers the 50K profit and she has no Capital Gains tax for 2017.

The moral of this story. Do not gift Assets while alive unless they are under the Gift tax to avoid costly capital gain and income taxes. There are other ways to gift assets while alive that avoid taxes and protect you and your beneficiaries.

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