Question

Jasmine has decided that while she likes flowers, she does not like getting her hands dirty. She decides to sell her interest in FG to Rose for $150,000. Assume that at the time of sale, her properly calculated tax basis in FG is $135,000.

Here are some additional facts: FG has total debt outstanding of $105,000. FG is a cash basis business. FG has receivables from sales to customers of $60,000. FG has other tangible assets with a FMV of $300,000 and a tax basis of $450,000. Everyone agrees that the going concern value of FG is $195,000.

How would this transaction be reported on Jasmine's tax return?

What is Rose's initial tax basis in FG?

Answer 1

She has sold her interest for $150000 and her properly calculated tax basis in FG is $ 135000.One has to pay capital gains tax or have a capital loss based on the difference between adjusted basis and the amount for which asset is sold. Hence, $15000 is charged as Capital Gain and subject to tax as per the rate prevailing in the year in which the same is sold.

The cost basis of any investment is equal to the original purchase price of an asset. Every investment will start out with this status, and if it ends up being the only purchase, determining the cost is as simple as keeping a record on what the original purchase price was. Note that it is allowable to include the cost of a trade, such as a stock-trade commission. This can also be used to reduce the eventual sales price. Hence, from the above, it is rightly said that the cost basis in FG is $150000 subject to any pre or post capitalisation profit which can not be calculated in absence of required data.