CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsMedium
A client, Ms. Harris, received a gift of land from her aunt. At the time of the gift, the land had a fair market value (FMV) of $100,000, and her aunt's adjusted basis was $120,000. Ms. Harris later sold the land for $110,000. What is Ms. Harris's recognized gain or loss on the sale?
- A$10,000 gain
- B$10,000 loss
- C$0
- D$20,000 loss
Show answer & explanationAnswer & explanation
Correct answer: C. $0
This scenario involves the dual basis rule for gifted property. If the selling price is between the donor's basis ($120,000) and the FMV at the time of gift ($100,000), no gain or loss is recognized. Ms. Harris sold the land for $110,000, which falls within this range.
Why the other options are wrong
- A. Incorrect. This would be the gain if the basis was $100,000, but the dual basis rule applies.
- B. Incorrect. This would be the loss if the basis was $120,000, but the dual basis rule prevents recognizing a loss.
- D. Incorrect. This would be the loss if the basis was $130,000, which is not applicable here.
Gifted Property Dual Basis Rule
For gifted property, the basis for determining gain is the donor's adjusted basis, but the basis for determining loss is the property's FMV at the time of the gift. If the selling price is between these two amounts, no gain or loss is recognized.
- Gain basis = Donor's adjusted basis.
- Loss basis = FMV at gift date.
- If sale price is between gain and loss basis, no gain/loss recognized.
Memory trick: Gifted Basis, Two Faces: Gain's High, Loss's Low, Middle is Zero Show.