2.4.  Tax Basis

Essential to understanding how to calculate a DPP member or partner’s tax liability is the concept of basis. Basis is the amount of capital invested in an asset or a business as calculated for tax purposes.

The initial acquisition cost of an asset is called its cost basis. The asset’s initial cost basis depends on how it was acquired. If the asset has been purchased, its cost basis is the price paid, including fees and commissions, sales and transfer taxes. It also includes any liabilities assumed, such as a mortgage. If the asset is inherited, the heir’s cost basis will be the asset’s fair market value on the date of death.  If the asset is acquired as a gift, the recipient’s cost basis will be either the donor’s adjusted cost basis at the time the asset is gifted or the asset’s fair market value, whichever is lower.

If the asset is a property, determining the recipient’s cost basis is more complicated. If the property’s fair market value is greater than the donor’s adjusted cost basis, then the recipient’s cost basis is the donor’s adjusted cost basis at the time the gift is received. If the property’s fair market value is lower than the donor’s adjusted cost basis, then the recipient’s cost basis will not be known until he or she sells the property. It will be the don