Making Cents: How to track basis
By: John P. Napolitano, CFP®, CPA, PFS, MST
The term ‘basis’ is frequently bantered about. Basis is tax speak for cost. In order to know how much of your sale of virtually any asset represented a taxable gain, you need to know the cost basis of the asset sold.
Determining your basis is never an easy task, especially for assets held a long time or inherited. So, let’s start with the easy stuff. For financial assets, the tax basis should be right on the monthly statement. If you do not have that information, call the company and ask if they can help you track your basis. Don’t forget the re-investment of dividends and other distributions. When you own a fund and elect to reinvest dividends and distributions, you get taxed on that gain but never see the money because it is reinvested in the fund. The amounts of reinvested dividends and distributions should be added to your original purchase price to determine your total cost basis of the fund.
For stocks or bonds, these too should be on your statement. But in the case of holdings bought long ago or transferred in from another brokerage firm, you may have to do a little digging. If you have looked through old statements and exhausted your resources from the former brokerage firm to the current firm, you may have no choice but to estimate the basis. Take your best guestimate of the purchase time and then look up the price of the particular security in question.
For inherited or gifted securities, there is a greater likelihood of having an unknown basis. The actual basis of inherited assets is equal to the fair market value of the asset on the date of the decedents passing. This is easy enough to look up as long as you know the date of death.
For gifted assets, your basis is what the IRS calls a carryover basis. That means that your tax cost is the same tax cost as it was for the original purchaser. In practice, we often see gifts of everything from real estate to securities where little attention was paid to the purpose of the gift or the tax basis. As a result, many are surprised at tax time when they learn the amount that they owe from the gain on the sale.
Perhaps one of the most problematic of cost basis calculations arises with real estate that’s been owned for a long time. For either personal use real estate or rental real estate, there are certain capital expenditures that add to basis. For rental property, prior depreciation will also reduce the basis. In order to make this as easy as possible for your future sale or gift, start a file now that tracks every nickel you spend on real estate. If you haven’t done this yet, go back now and use your best memory of the types and costs of improvements that you’ve made.
John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice.
John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.