Tax Basis

REG questions rarely ask “what is basis”—they hand you a fact pattern and make you pick the right starting basis first. The tell is how the property was acquired: purchased property takes cost basis, gifted property generally takes the donor’s carryover (transferred) basis, and inherited property takes a fair-market-value basis at the date of death (or the alternate valuation date)—usually a “step-up,” though it can be a step-down. The trap is the dual-basis gift rule: if gift-date FMV is below the donor’s basis, use carryover basis for gain, FMV for loss, and recognize no gain or loss if the sale price lands between them.

Don’t confuse basis with the related concepts. Capital gains is the result once you subtract basis from amount realized. In a like-kind exchange (real property only since 2018), basis carries over so the deferred gain lives inside the replacement property’s lower basis; here boot received decreases basis while gain recognized increases it—don’t let “boot” fool you into raising it. MACRS depreciation reduces basis annually, so a later sale shows a larger gain—the reason depreciation recapture exists. Hook: GIFT = carryover, DEATH = step-up.