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Common situations that cause trouble for income tax professionals involve capital gain calculations. The difficulty rests with obtaining complete information from the taxpayers. Selling any investment or business property mandates determination of the capital gain or loss. In fact, selling any personal asset for a gain is taxable.
Since a capital gain is the difference between sales price and basis, IRS jobs of assessing the capital gain tax require details to determine basis. Unfortunately, taxpayer confusion about basis causes considerable complications. This is especially true for assets acquired in ways other than purchase. In order to unwind the historical elements that reveal basis, the expertise of an IRS enrolled agent is particularly beneficial.
Sometimes taxpayers only know a narrative behind how they came to own property – without any numbers. These situations are tricky but not impossible for obtaining the property basis. In many cases the basis is the cost incurred by someone who gave property to a taxpayer. When the donor is long since deceased, a little detective work is required. But the quest begins with someone possessing the benefit of enrolled agent courses, who knows that basis is carried over with gifting.
Assets gifted through trust arrangements are a little easier because a trustee is likely to know the donor’s basis. Property is often left in trust so that income derived from it is provided to a specified beneficiary. Upon the death of the beneficiary, the trust corpus – consisting of the property placed in the trust – is distributed to remainder parties designated by the trust creator.
Enrolled agents know that trust assets are separate from property owned by a beneficiary. This is an important distinction covered in EA continuing education. The individual who merely receives trust income does not have a full interest in the property. Just because distribution of trust property occurs as a result of the beneficiary’s death, the property isn’t actually acquired from that person.
Since trust property is not part of the beneficiary’s estate upon his death, there is no step up in basis when the trust corpus is distributed to the next generation. Instead, the basis in the property is like any gift – grandpa’s basis carries over for a trust he created while he was living. Of course, if grandpa’s trust was created upon his death, the basis in trust property is the value on his date of death.
The basis in property distributed from a trust is the trust’s basis – which is the cost basis of the trust creator unless it is a testamentary trust. This fact is presented in enrolled agent exam preparation and it is often an important element for discovery of taxpayer basis. As a practical matter, the taxpayer receiving property from a trust is getting a gift from the trust creator. Revelation of this fact unwinds the mystery of basis for property received from a distribution of trust corpus.
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.