Just to throw this out there as clarification for anyone reading this thread, the IRS defines the Basis of Assets in Tax Topic 703 as follows:
"Topic 703 - Basis of Assets
Basis is generally the amount of your capital investment in property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange, or other disposition of the property.
In most situations, the basis of an asset is its cost to you. The cost is the amount you pay for it in cash, debt obligations, and other property or services. Cost includes sales tax and other expenses connected with the purchase. Your basis in some assets is not determined by the cost to you. If you acquire property other than through a purchase (such as a gift or an inheritance), refer toPublication 551, Basis of Assets, for more information. If you acquired your property from an individual who died in 2010, special rules may apply to your calculation of basis. In addition to reviewing Publication 551, you may need to review Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010."
I've never heard of an arbitrary step up in basis. If you could arbitrarily create your tax basis on a perceived value, why would anyone ever pay capital gains? All step ups in basis are due to an event that has occurred. The amount of transfer tax from your county recorder is based on the locally assessed value or actual amount of value transferred and is completely different than your IRS tax basis. I'm sure the county was happy for you to arbitrarily raise the transfer value and pay more tax than required. As a CPA, I'd be very interested to hear if your CPA comes up with any different answer and what research, IRS publications or Revenue Rulings they use to support their stance.
Until then, I recommend anyone reading this to use your purchase price and the applicable adjustments to basis as your tax basis. As always, consult your CPA for your specific situation.
