I:5-35 Sale of Property Received as a Gift. During the current year, Stan sells
ID: 2348239 • Letter: I
Question
I:5-35 Sale of Property Received as a Gift. During the current year, Stan sells a tract of land for $800,000. The property was received as a gift from Maxine on March 10, 1995, when the property had a $310,000 FMV. The taxable gift was $300,000 because the annual exclusionwas $10,000 in 1995. Maxine purchased the property on April 12, 1980, for $110,000. At the time of the gift, Maxine paid a gift tax of $12,000. In order to sell the property, Stan paid a sales commission of $16,000.
a. What is Stan’s realized gain on the sale?
b. How would your answer to Part a change, if at all, if the FMV of the gift property was $85,000 as of the date of the gift?
Explanation / Answer
a. The donees basis in property acquired by gift is the donor's basis, increased for any gift tax paid attributable to appreciation. So Stan's basis is 110,000 increased by: gift tax paid X (FMV at time of gift - donor's basis)/(FMV at time of gift - annual exclusion) = 12,000 X ((310,000 - 110,000)/(310,000 - 10,000)) = 12,000 x (200,000/300,000) = 8,000 So Stan's basis is 110,000 + 8,000 = 119,000. His gain on the sale is the sales prices minus his basis minus the sales commission: 800,000 - 119,000 - 16,000 = 665,000 b. If the FMV at the time of the gift is less than the donor's basis, the donee has a dual basis for the property. In the case of the property being transferred later at a gain, the donor's basis is used. None of the gift tax paid would have been attributable to appreciation, since the FMV is less than the donor's basis at the time of the gift. So in this case the gain is 800,000 - 110,000 - 16,000 = 674,000