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8 Common Questions about Cost Basis

Personal Finance Taxes
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What is cost basis, and how do you go about finding it?

You’re making great progress on your tax return, when suddenly you need to enter something called a “cost basis” for an asset. If only that were as simple as remembering what you paid for the asset.

Here are 7 questions and answers about cost basis to help you finish your return accurately and quickly.

When do I need to know the cost basis in an asset?

You’ll need the cost basis in an asset when you claim a credit or another tax break based on the asset, or when you deduct depreciation on the asset.

You’ll also need to know your cost basis when you sell or trade an asset in order to determine your gain or loss on the sale or the basis in a new asset acquired by trade.

How can I find the original cost basis of something I purchased?

Look for your receipt or other record of the purchase, such as a credit card statement or canceled check. If the asset is real estate, you should have closing papers. For stocks and other securities, look for your brokerage statement.

If you purchased stocks on or after January 1, 2011, your brokerage keeps track of the stock basis for you. For mutual funds and similar investments, they keep track of your purchases on or after January 1, 2012.

If you purchased securities before these dates, look for your brokerage statements for the year you purchased the stock. You may also be able to find information online, or you can call your broker.

Does cost basis include sales tax and shipping?

Sales tax and shipping are considered to be part of the cost of an item.

What if I inherited an asset?

When you inherit something, whether it’s a car, real estate, or a mutual fund, your basis is generally the value of the property on the date of the person’s death. If it’s gone up in value since that date and you sell it, you may have a gain.

If the personal representative of the estate elects to use an alternate date, your cost basis is the fair market value on that alternate date. Ask the personal representative if you’re not sure.

Special rules may apply to inherited farmland or a closely held business, or if the person died in 2010.

I had a trade-in when I bought this car. What’s my basis?

If you trade in a car or truck, your basis in the new vehicle is your basis in the old one, plus the amount you paid with the trade-in.

For example, let’s say you have a car with a basis of $2,000. You trade it in for a new car, and you pay $20,000 cash. The basis in your new car is $22,000 ($2,000 + 20,000 = $22,000).

I sold mutual fund shares last year. Do I need to adjust my basis?

When you own mutual funds, you may pay tax on reinvested dividends and capital gains while you hold the funds. You don’t want to pay tax on those dividends and gains again when you sell the mutual fund shares.

Be sure you increase your mutual fund shares basis by the amount of any dividends and gains on which you’ve paid tax.

What are some other reasons I may need to adjust my cost basis?

If the stock splits, and you sell less than 100% of your shares of a stock, you’ll need to adjust your cost basis for the split so you can correctly calculate your cost basis. The same is true if the stock has a reverse split.

You need to lower your cost basis for tax benefits you receive. For example, your depreciation deductions over the years reduce your basis in real estate investments.

To adjust your cost basis for depreciation, look at your tax returns, starting with the year you purchased an asset. Add together all the depreciation taken for the asset, and reduce your basis by that amount.

I only sold some of my stock in a company, which I bought at different times and at different prices. How do I know which stock I sold?

If you sold only some of your shares in a company, but you didn’t tell your broker which stocks you sold, by default you use the first-in-first-out method, known as FIFO.

The IRS requires you to assume that you sold your oldest stocks, which unfortunately might be the ones with the lowest cost basis. This may not be the best tax result for you.

If you’d rather sell other stocks from a particular company, you must tell your broker ahead of time. You must also get a confirmation from your broker saying which stocks you sold.

Do you keep receipts for major purchases in a folder or other designated place?

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Photo credit: Zione’s pictures via photopin cc

File your taxes with confidence.

Your max tax refund is guaranteed.

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