Negative basis is a lose way of saying negative capital--debt in excess of basis. Many long term real estate investors I work with use this as a term. The basis is not actually negative.

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Posted by LSUFanHouston

NOLA

Member since Jul 2009

37333 posts

Posted on 1/21/15 at 4:55 pm to Maderan

quote:
Negative basis is a lose way of saying negative capital--debt in excess of basis

Thanks for the clarification.

My other comments still stand - for a investor to get in that situation, you would either have a deferred rolled-in gain or money recently taken out that was not capitalized. There's gotta be a flip somewhere. If the money was taken from property A causing this negative capital, and put into property B, then property B has more capital than it would have if the mortgage was taken out against property. In sum, it should the same financial situation (But on a property by property basis, it's a tough spot to be in, I agree).

Do you know of other situations that would cause this?

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Posted by Poodlebrain

Way Right of Rex

Member since Jan 2004

19860 posts

Posted on 1/21/15 at 9:29 pm to LSUFanHouston

quote:
Well, for starters, it's up to the seller of an asset to show basis, right? In the absence of that, the basis is zero.

Taxpayers report the basis, and only have to substantiate the claimed basis in the event of examination. Using your scheme the IRS would have to examine every return with a sale of an asset that was not a covered security. Administratively, it would be too burdensome on taxpayers and the IRS to be practical.

quote:
How can cash have a basis that is not equal to FMV? The basis of cash is always $1 for each $1 of cash held.

What I meant was that the receipt of cash with a deemed zero basis would mean the immediate recognition of income equal to the amount of cash received by the recipient. The recognition of income would then provide basis in the money received similar to gain recognition providing basis for non-cash assets received in a sale or exchange.

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