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A person was an artist fro 10 years and over those years he

painted a large number of...
A person was an artist fro 10 years and over those years he painted a large number of paintings. One year prior to his death he decided to be a professional artist. He filed a Schedule C for that year as being the sole owner of the business. All his prior painting became part of his business inventory. During the year prior to his death he sold painting in the amount of 10k and produced new paintings in the amount of 2k for this year. At the time of his death the total fair market value of the unsold paintings was 75k. His wife inherited those paintings upon his death. Upon his death his painting business was terminated. Five years after his death there was a fire and all paintings were destroyed. How much can the wife claim as a casualty loss for the paintings?.
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Answered in 22 minutes by:
11/21/2017
Lev
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 30,328
Experience: Personal Investment, Tax Preparation
Verified

At the time of casualty - the casualty loss is determined using following steps.

1. Figure your adjusted basis in the property before the casualty. As paintings were inherited - the fair market value at the time the decedent passed away becomes stepped up basis for these assets.

2. Figure the decrease in fair market value (FMV) of the property resulting from the casualty. As the property is completely destroyed - the FMV after casualty is zero. So the FMV before the casualty will be the actual decrease in FMV.

3. From the smaller of the amounts in steps 1 and 2, subtract insurance or other reimbursement you received or expect to receive.

Assuming there is no insurance reimbursement - the casualty loss will be the smaller between FMV at the time the decedent passed away and the FMV before the casualty.

Let me know if you need any help with reporting.

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Customer reply replied 24 days ago
thank you. does it make any difference whether some paintings were created during the time the business was functioning or while other paintings were created prior to opening the art business? In other words would the stepped up basis would apply equally to paintings created before AND during the art business? Would the same stepped up basis rule also apply to the paintings which the artist never converted into business property and never planned to sell?
Customer reply replied 24 days ago
one more comment - -please note (you may know this already) that if it is not for the stepped up basis (which is FMV at the time of death) -- the regular basis for the painting would have only been the cost of materials - -as the paintings is the creation of the artist himself.

The taxpayer who had the casualty - the wife - had NO business - and for her these paintings just assets - and not business inventory.

The stepped up basis is assigned to INHERITED assets - those included into estate - regardless when and how these assets were created or acquired.

You are correct that the basis for her husband was the cost of materials.

But since these were inherited - we should use the FMV at the time of his death as stepped up basis.

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Customer reply replied 23 days ago
thank you.On the other hand for the portion of the husband's painting which were not converted into HIS business prior to his death (and kept for family personal enjoyment), the wife should only be able to get 1/2 of the paintings on the stepped up basis as the other half of the paintings belonged to her prior to the husband's death. Is it a true statement.

That is not exactly true...

The stepped up basis is assigned to assets which are included into the decadent's estate.

In other words - all assets owned by the decedent at the time of death are getting stepped up basis.
That is regardless if these are business or personal assets.
NOW - when assets are owned jointly with the spouse - we need to verify the state law.

If that is a community property state - the FULL value of such assets will get stepped up basis,

but if that is not a community property state - only a half of jointly owned assets get stepped up basis.

Again - that is regardless how assets are used - for business, investment or personal purposes.

The ownership and state law will direct tax treatment.

Lev
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 30,328
Experience: Personal Investment, Tax Preparation
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Customer reply replied 23 days ago
thank you I am rating you 5 stars and will have a separate question for you.
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Lev
Lev
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Satisfied Customers: 30,328
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