Question

What is a capital asset? What is basis? How is basis adjusted? What are some capital assets that you have (list 10 that are not securities)? How would you be taxed on each asset if you were to sell it today?

Answer 1

1. What is a Capital Asset?

Answer: A capital asset is defined to include property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating. Thus, land and building, plant and machinery, motorcar, furniture, jewellery, route permits, goodwill, tenancy rights, patents, trademarks, shares, debentures, securities, units, mutual funds, zero-coupon bonds etc. are capital assets.

2. What is Basis?

Answer: Your basis in a business asset is basically the cost of that asset. The term applies to all kinds of capital assets that are owned by your business, including real estate, land, equipment, and investments owned by the company, such as stocks, bonds, ETF's, and mutual funds. The cost of the asset includes the purchase price, shipping, installation, sales tax, and other expenses associated with its purchase.

3. How is Basis Adjusted?

Answer: 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 increased by capital expenditures.

Adjusted basis is calculated by beginning with an asset's original cost basis, and then making adjustments. Adjusted basis is calculated as follows:

1. Purchase costs (title & escrow fees, broker commissions, shipping, sales tax, etc.)
2. Improvements (rehabilitation expenses & substantial repairs)
3. Legal fees (to defend or to perfect title to the property, zoning costs, etc.)
4. Selling costs (title & escrow fees, broker commissions, shipping, transfer fees, etc.)

Minus the costs represented by:

1. Accumulated depreciation, depletion, or amortization
2. Casualty or theft Loss
3. Other decreases to basis

4. What are some capital assets that you have (list 10 that are not securities)?

Answer:

1. Land & Building

2. Plant & Machinery

3. Motor Car

4. Furniture

5. Jewelry

6. Goodwill

7. Tenancy Rights

8. Leased Property

9. Electrical Fittings

10. Computer & Software, etc.

5. How would you be taxed on each asset if you were to sell it today?

Answer: Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes. The Amount Realized – Adjusted Basis tells the amount of Realized Gain (if positive) or Realized Loss (if negative).

Example: Smith buys a lot for $100,000. He then erects a retail facility for $600,000, then depreciates the improvements for tax purposes at the rate of $15,000 per year. After three years his adjusted tax basis is $655,000 [$100,000 + $600,000 - (3 x $15,000)].