Determining Tax Basis and Holding Period for Non Passive Activities

Determining Tax Basis and Holding Period for Non Passive Activities is one of those 'Secrets of the Golden Flower' that seems to be both completely esoteric and yet oh so real at the same time. Let's take a closer look under the hood, shall we...

According to IRS Publication 544 holding period is generally speaking the length of time a capital asset is owned. It is important because of the tax benefits of long term capital gain or loss treatment according to IRC Sec 1223. If the capital gain property is held for more than 12 months, gain or loss is long-term according to IRC Sec. 1222.

In determining a property's holding period you generally exclude the purchase date but include the sale date. To determine if property has been held long enough to qualify as long-term capital gain, begin counting the holding period on the day after the property was acquired.

When the basis of transferred property carries over, as in an IRC Sec. 1031 exchange, the holding period of the prior owner “tacks on” to the current owner's holding period according to IRC Sec. 1223(1).

If property is constructed over a period longer than one year and is sold after completion, it may have been held partly for the short-term and partly for the long-term holding periods. The cost of construction completed within the short-term holding period ending with the date of sale has a short-term holding period. The cost of construction completed more than 12 months before the date of sale has a long-term holding period. Land and improvements usually tend to have different holding periods because most people buy land first and then build on that land at a later date. As such the holding period varies based on when development begins and/or improvements constructed.

The purpose of taxing capital gains at lower rates than other income was to stimulate consummation of profitable transactions in property bought for investment according to the Revenue Act 1921, § 206(b).

For more information on this contact me anytime at your convenience.

John R. Dundon, EA [720-234-1177, John@JohnRDundon.com]. John is a lifelong student of the US Tax Code; enrolled with the United States Treasury Department to practice before the IRS (Enrolled Agent # 00085353); under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent; regulated under USC 31 Section 330 & USC 26 Section 7525a.3.A; governed under US Treasury Cir. 230.

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Posted in 1031 Exchange, 1231 Exchange, Asset Classification, Basis, Capital Gain, Capital Loss, Cost Basis, Tax Guidance & Preparation

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