CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsHard
A client, Ms. Perez, received a gift of stock from her father. At the time of the gift, the stock had a fair market value (FMV) of $50,000 and her father's adjusted basis was $60,000. Ms. Perez sold the stock for $55,000. What is Ms. Perez's recognized gain or loss on the sale?
- A$0
- B$5,000 capital loss
- C$5,000 capital gain
- D$10,000 capital loss
Show answer & explanationAnswer & explanation
Correct answer: A. $0
When property is acquired by gift, the basis for determining gain is the donor's adjusted basis ($60,000). The basis for determining loss is the lesser of the donor's adjusted basis or the FMV at the time of the gift ($50,000). If the selling price is between these two bases (i.e., $50,000 < $55,000 < $60,000), no gain or loss is recognized.
Why the other options are wrong
- B. This option incorrectly calculates a loss using the FMV as the basis for loss, but the selling price is above that.
- C. This option incorrectly calculates a gain using the FMV as the basis for gain, which is not applicable in this 'no gain/loss' scenario.
- D. This option incorrectly calculates a loss using the donor's basis for loss, but the selling price is above the loss basis.
Basis of Gifted Property (Dual Basis Rule)
For gifted property, the basis for determining gain is the donor's adjusted basis. The basis for determining loss is the lesser of the donor's adjusted basis or the fair market value at the time of the gift. If the selling price is between these two bases, no gain or loss is recognized.
- Gain Basis = Donor's Adjusted Basis.
- Loss Basis = Lesser of Donor's Basis or FMV at Gift.
- Selling price between bases = No recognized gain or loss.
Memory trick: Gifted Basis: 'Gain from Donor, Loss from Lesser, Middle is No Stressor.'