Dual Basis Questions On EA Exam

Dual Basis Questions On EA Exam

Dual Basis Questions On EA Exam

One of the best methods for prospective enrolled agents to prepare for the IRS EA exam is to answer as many EA exam review questions as possible leading up to the test. Since certain subjects seem to always, appear on the EA exam it makes sense to cover those areas more frequently in your studies. One such topic you are likely to see is the concept of "dual basis." The intention of this rule is to prevent taxpayers with unrealized losses from shifting the loss to others simply by bestowing property upon them. For this reason, a different basis is used if the property could be sold at a loss at the time the gift is made.

To establish the basis of property received as a gift a taxpayer must know the adjusted basis to the donor (source of gift), its fair market value (FMV) at the time the donor gifted the property, and any gift tax paid on it. The relationship between the FMV and the donor's basis determines the applicable rule. If a taxpayer receives a gift of property and the donor's adjusted basis determines the basis, the IRS considers the taxpayer's holding period to have started on the same day the donor's holding period started. If the fair market value of the property determines the basis, the holding period starts on the day after the date of the gift.

FMV less than donor's adjusted basis - Basis depends on whether a gain or a loss occurs when the property is disposed of. The following dual basis rules prevent taxpayers from shifting unrealized losses to other taxpayers:

The basis for figuring gain is the same as the donor's adjusted basis,

The basis for figuring loss is its FMV when the taxpayer received the gift.

FMV equal to or greater than donor's adjusted basis - Basis is the donor's adjusted basis at the time the taxpayer received the gift. If the donor paid gift tax on the transfer, basis increases by the part of the gift tax that is due to the net increase in value of the gift. The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Figure the increase by multiplying the gift tax paid by a fraction.

IRS Circular 230 Disclosure - Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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