Capital gain is defined as "the excess of net long-term capital gain over net short-term

capital loss for the taxable year" (IRC § 1222 (16)).

"Basis" is the starting point for determining gain or loss.

The basis of the property may be:

a. Its cost

b. Its fair market value at a specified date

c. Its substituted basis

Basis must be adjusted for such items as depreciation and costs of improvements. Basis used to determine the amount of gain or loss upon the sale or exchange of a capital asset. For property acquired by purchase or exchange the basis would be:

The taxpayer's cost - the cash paid for the property or the fair market value of the

property given for it (I RC § 1012).

For property acquired from a decedent there is a

Stepped-up basis - fair market value of the property at the date of the decedent's

death.

Exception: This does not apply to "income in respect of a decedent" - normally. the

basis of such income is zero (IRC § 1014 (c).

Exception: does not apply to appreciated property acquired by the decedent by gift

within one year of the death where the one receiving the property from the decedent is

the donor or donor's spouse - basis becomes basis of the property in the hands of the

decedent immediately before decedent's death (IRC § 1013 (c)).

The "stepped-up basis" rule applies only to property includable in the decedent's

gross estate for federal tax purposes (IRC § 1014 (b) (9)).

Jointly held property

Exception:

One who acquired property from a decedent spouse in the case of joint interest created after 1976, who with the surviving spouse has a qualified joint interest in the property (held as tenants by the entirety or joint tenants with right of survivorship, and are the only tenants (IRC § 2040 (b» - receives a stepped up basis equal to one-half of the value of that interest.

Community property:

The stepped-up basis rule applies to the decedent's one-half interest and to the surviving spouse's one-half interest (IRC § 1014 (b) (6))

Qualified terminable interest property: upon the death of the surviving spouse, the QTIP property is considered "acquired from or to have passed from the decedent" for the purposes of receiving a new basis at death (IRC § 1014 (b) (10).

Capital Gains Implications for the Investor

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the maximum rate

on the net capital gains rate of an individual (net long-term capital gains less net short term

capital losses).

• LONG-TERM is defined as more than 12 months

• SHORT-TERM - is defined as 12 months or less. "Short-term gains" are

taxed at ordinary income rates.