Morgan owned a convertible that he purchased two years ago for $46,000 and which he transfers to his sole proprietorship. How is the sole proprietorship’s basis for the car calculated? What additional information does Morgan need?
What will be an ideal response?
Morgan needs to calculate both the gain basis and the loss basis of the convertible for the sole proprietorship. The gain basis is a carryover basis, and the loss basis is the lower of Morgan’s adjusted basis or the fair market value on the date of the transfer. So Morgan needs to determine the FMV and to identify the beginning of the holding period. The holding period associated with the gain basis includes the two years that Morgan has owned the convertible. The holding period associated with the loss basis starts on the date of the transfer.
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