Question

DISCUSSION #3 

TECHNICALLY DEPRECIATION STARTS WHEN AN ASSET IS PLACED IN SERVICE AND STOPS WHEN THE ASSET IS PERMANENTLY REMOVED FROM SERVICE.  WHEN CALCULATING DEPRECIATION, THE STARTING POINT IS TO DETERMINE BEGINNING COST (AKA BASIS) OF THE ASSET.  WE CAN ACQUIRE A NEW ASSET BY 1) PURCHASE, 2) TRADE-IN, 3) GIFT OR 4) INHERITANCE.  HOW WOULD THE INITIAL COST (BASIS) BE DETERMINED UNDER EACH OF THE FOUR ABOVE APPROACHES.

Answer 1

1. Purchase : The purchase price is the basis of the asset purchased.

2. Trade In - The asset is traded for another is called a trade in acquisition. usually the new asset uses the basis of the old asset, if the trade in is of similar assets, in case of trade in of dissimilar assets, the fair market value of the new asset is the basis.

3. Gift: The cost basis for the gifted assets usually is the original cost basis of the giver of gift.

4. Inheritance: The cost basis of the inherited asset is usually the fair market value of the asset at the time of the death of the decendent.