Advanced Underwriting Consultants



Financial planning professionals often help their clients position assets properly to meet the clients’ financial goals.  Sometimes this means liquidating certain assets in order to reinvest in others.  When a client decides whether or not to sell assets to buy others, the tax consequences must be taken into account.

When assets are sold, gain or loss on the transaction is usually recognized for federal income tax purposes.  Gain is measured by comparing the net proceeds the client receives against the client’s income tax basis, sometimes also called cost basis.

What is cost basis, how is it calculated and when is it important?

The IRS says that cost basis is the amount of investment in property or security for tax purposes. It is used to figure gain or loss on the sale or other disposition of property.  It is also used to figure depreciation, amortization, and casualty losses.

Cost basis can be an especially important number for the owner of a closely held business.  For example, if the business is organized as an S corporation or partnership, the owner’s cost basis may allow certain distributions to be tax free.  Further, if the owner of a business sells to family or a third party, cost basis will dictate how much of the sales proceeds are subject to capital gains tax.

In 2010, the concept of basis is even more important in the estate planning context.  The traditional step-up in basis rule has been replaced with a limited step-up rule, accompanied by carryover basis rules for remaining assets.  This change makes planning for the taxes associated with a client’s death more problematic.

Many of our clients will look for our help in calculating the cost basis of their assets.