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REG CPA Practice Questions: Capital Gains from the Sale of Gifted Assets
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on how to calculate capital gains to be included in the gross income of an individual from the sale of gifted assets. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-calculate-capital-gains-from-the-sale-of-gifted-assets/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 0:00 Intro 00:51 Question 1: Calculating a Capital Gain from the Sale of a Gifted Asset 03:19 Question 2: Calculating a Long-Term Capital Gain 05:52 Question 3: Calculating the Capital Gain on the Sale of Gifted Real Estate, including Depreciation 07:44 Question 4: Situations Where There is No Gain or Loss on the Sale of a Gifted Asset 10:53 Question 5: Calculating a Capital Loss on the Sale of a Gifted Asset 12:31 Pillar Topics
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Hi, I'm Logan, and in today's video, we're going to be going over calculating capital gains on the sale of assets received as gifts
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But we're going to be doing it the superfast CPA way, which is going straight into questions to learn the material
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Now, if you don't know much about the superfast CPA strategies, again, that's our main strategy
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We call it questions first. And we have other strategies that you can learn about if you go to superfastcpa.com and watch our free one-hour webinar training
0:26
We go over the six key ingredients to passing the CPA exam and you don't want to miss it
0:31
Again, it's only one hour long, it's free, and you will save months and months of struggling
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with the exams and your studying. If you like the idea of using questions as your main learning tool, we do have mini quizzes
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in the super fast CPA app that you can easily use throughout the day
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I'll tell you more about that at the end of the video. But with all that said, let's dive straight into some questions
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Here's the first question. In year one, Margaret received shares of a publicly traded company
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as a gift from her brother, who had purchased the shares two years earlier. The fair market value of the
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shares at the time of the gift was $12,000, but her brother's adjusted basis was $10,000. Margaret sold
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the shares for $16,000 six months after receiving them. Considering the holding period and the basis
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rules for gifted assets determine the amount and term of Margaret's capital gain. All right, if you don't
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know much about capital gains and short-term, long-term, or especially in this case, how it works
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with gifted assets, then you're in the right place. Now, in this situation, since this is the first question
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and we're treating this as if we don't know anything about capital gains
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let's go ahead and answer the question without knowing anything, and we will learn a lot from the explanation
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And that's the idea behind questions first. We use the questions as our learning material
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All right, let's go ahead and look at the answer. Okay, so the answer is C long-term capital gain of $6,000
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So why is that? The donee, Margaret, assumes the donor's holding period for the gifted shares
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which in this case is more than one year, making any gain on the sale a long-term capital gain
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The capital gain is calculated as the difference between the sale price, which is $16,000
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and the donor's adjusted basis, which was $10,000, resulting in a $6,000 gain
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Okay, so you might know a little bit about capital gains, or, you know, just gains in general
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It makes sense the selling price compared to the basis, is it a gain or a loss
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In this case, the sale price was $16,000, but the thing to remember with gifted assets is
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most of the time, the donie takes on the donor's basis for the asset and also the holding period
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So since her brother had the assets for two years, she takes on those two years to include in her
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holding period. And she also takes his adjusted basis as her basis. So instead of her going off of the
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fair market value, she goes based off of this $10,000 basis. So those are two things you can learn
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about gifted assets when it comes to capital gains. The donie takes on the donor's holding period and the donor's basis
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and then you base the gain off of that. We will learn a little bit more about a different rule that applies if there's a loss
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in a little bit. But that's the basic idea with gifted assets and capital gains
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So it makes sense that it was a long-term capital gain of $6,000. Let's go to the next question and learn some more
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All right, here's the next question. In year one, Anthony received a luxury watch as a gift from his sister
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The watch had a fair market value of $20,000 at the time of the gift. His sister had originally purchased the watch for $12,000 three years prior to giving it to Anthony
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Okay, so right there, just before we said anything else, if you learned anything from the last question
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we know that Anthony is going to take on that holding period of three years
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So this is going to be a long-term gain or loss. Well, gain probably based off of the answers
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No gift tax was paid on the transfer and Anthony sold the watch for $22,000 one year after he received it
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One note I want to make about gift tax Gift tax is pretty much if not at all covered in reg anymore Let me say that again Gift tax is not covered in reg I don think at all anymore Almost all of it if not all of it
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has been moved to TCP. So as far as reg goes, you're not going to be seeing gift tax
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Gift tax does affect or can affect the basis of the asset when it comes to figuring out the capital gain
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but we're not going to be dealing with that here in reg. We will deal with that later on when we get to TCP
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Just wanted to say that. What is the amount and term of the capital gain that Anthony must include in his gross income from the sale of the watch
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All right. So just based off of the last question, you learned a ton
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We know that it's going to be long term because Anthony takes on the three years of holding period
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that his sister had. And then we also learned that typically the don't
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takes on the donor's basis. So what was her basis? She purchased it for $12,000. So that's his
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basis and then he sold it for $22,000. So we know it's long term and it looks like it's a $10,000
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gain. So let's see if we're right. $10,000 long term capital gain. Yep. The basis of
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the gifted watch in Anthony's hands is the same as his sister's adjusted basis at the time of
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the gift, which is $12,000. The term of the gain is long term because the holding period
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includes the time the sister owned the watch totaling four years. Just a reminder, in case you forgot, anything that is a year or less as a holding period
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before selling it is a short-term gain or loss, and anything greater than a year is going to be long-term
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So just a reminder about that. Therefore, the capital gain is calculated as the sales 22,000 minus the adjusted basis of 12,000
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So that makes sense. All right, let's go to the next question and see if we can start adding a little bit more
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complexity and learning different things. All right, here's the next question. In year three, Diego was given a piece of commercial real
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estate by his business mentor. I wish I had a business mentor that gave me real estate. At the time of
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the gift, the property had a fair market value of $500,000. His mentor's adjusted basis in the property
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right before the gift was $400,000. Diego used the property in his business and claimed depreciation
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deduction totaling $50,000 over the next five years. In year nine, he sold the property for $550,000
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What is the amount and term of the capital gain Diego must report from the sale of the property
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Okay. So this is pretty similar, but we have one wrench thrown in there of the depreciation
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Take a second. Pause the video. We've already done two questions going over this, so you probably could figure this out
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Again, pause the video. See if you can get the correct answer. And when you're done, come back and we'll look at the answer together
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All right, let's look at the answer. So the answer is $200,000 long-term capital gain
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The starting basis for Diego's property is the transferred basis from the mentor, which is $400,000
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After depreciation deductions, the adjusted basis becomes $350,000. That makes sense because they had depreciation over those five years
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The gain on the sale is the selling price, $550,000, minus the adjusted basis, which is $350,000
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but that's the adjusted basis using the donor's basis, which equals a $200,000 gain
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The gain is long term because Diego's holding period includes his mentor's holding period
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which combined with Diego's own holding period is more than one year. So gifted assets when it comes to capital gains is pretty straightforward
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We are going to introduce one more layer in the next couple questions, but there's not too much else
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You just need to remember holding period and basis is from the donor to the donee most of the time
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but we're about to throw one more wrench into the equation. So let's go ahead and go to the next question
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Okay. In year one, Anita received an antique necklace from her mother as a gift. The necklace
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had a fair market value of $18,000 at the time of the gift. The mother's adjusted basis in the
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necklace due to significant restoration work she had financed was Anita sold the necklace for two years later Okay so so far we have always taken on the donor adjusted basis We always have so far
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But in this situation, is that still the case where the fair market value is less than what
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they sold it for, but the adjusted basis is still greater? So would it be a loss
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If we're basing it off to the adjusted basis, it would be a loss. So take a second, think about it
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If you know this rule, that's awesome. but if not, let's go ahead and go straight into the answer
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So no gain or loss. So this is where things start getting a little tricky when it comes to gifted assets and capital gains or losses
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When a gifted property is sold at a price that is more than the fair market value at the time of the gift
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but less than the donor's adjusted basis, the result is neither a gain or loss for the recipient
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In this case, the mother's adjusted basis was 24,000 and the fair market value at the time of the gift was 18,000
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Since Anita sold the necklace for 20,000, it is more than the number. the fair market value, but less than the basis. Therefore, Anita does not realize a gain or loss on the sale
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Okay. So this is where there's one extra weird rule, and I'll explain it here. So when it comes to
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gifted assets and capital gains and losses, if the gifted asset is sold for more than the adjusted
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basis, then it's a gain. And you use the donor's holding period. You use the adjusted basis of the
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holding of the donor, it's just pretty straightforward. And that's what would be included in an
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individual's gross income, which is what we're going over right now is what's included in an individual's
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gross income. But in situations where the selling price is less than the adjusted basis
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you have to figure out a couple things. You have to figure out if the selling price is still bigger
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than or greater than the fair market value, or if it's less than the fair market value as well as
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being less than the adjusted basis. So there's three different situations that happen. If the selling
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price is greater than the adjusted basis, then it's just a game. You just apply the rules we talked about
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before. If the selling price is less than the adjusted basis, but greater than the fair market value
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at the time of the gift, there's no gain or loss. And then we'll learn this in the next question
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but I'm just going to explain it now. If the selling price is less than the adjusted basis and less
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than the fair market value, then there is a loss, and you use the fair market value as the basis
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to determine how much the loss was. So again, we'll learn more about that in the last question
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but this is the most complicated part of gifted assets is remembering that if the selling price
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is less than the adjusted basis, you have to start thinking about it a little bit more. But as far as capital gains when it comes to gifted assets, if it's a gain, which means that
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the selling price was greater than the adjusted basis of the donor, then it's easy
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You just make it a gain. You just use the donor's basis and the donor's holding period
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All right. Let's learn the last bit of this. Here's the last question. In year one, Nathan received a
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collection of vintage comic books as a gift from his friend, Julian. The collection had a fair market
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value of $5,000 at the time of the gift. Julian's adjusted basis in the comic books due to rare
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acquisitions over the years was $7,000. Nathan sold the collection for $4,000 one year later
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Okay. What is the amount and character of Nathan's loss from the sale of the comic books. So this is the last question. I just explained some rules to you
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So see if you can remember what I just explained to you. Pause the video. See if you can figure out the
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correct answer. And when you're ready, come back and we'll go a little bit more in depth one last time
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All right. Let's look at the last answer. So a long-term capital loss of $1,000. Because Nathan
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sold the comic books for less than the fair market value at the time of the gift, the loss is calculated
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based on the fair market value, not Julian's adjusted basis. Thus, the loss is the difference between
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the fair market value at the time of the gift, which is $5,000, and the sale price, which is $4,000
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resulting in that $1,000 loss. The term of the loss is long term because the holding period for gifted
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property includes the time the asset was held by the donor Okay so this is applying that last rule that I was telling you Since the selling price is less than the adjusted basis we have to start thinking about it a little bit more And then we realized that the selling price is also less than the fair market value at the time of the gift So that where that final rule
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applies where you use the fair market value as the basis for determining the loss. So it's a $1,000
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loss. Okay, we learned a lot about gifted assets and capital gains when it comes to an individual's
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gross income in this video. So let's do one last part of the super fast CPA strategy, which is pillar topics. Now, if you don't know much about our strategies
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again, we do something called pillar topics after we've done the question's first approach
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This is where you take a second, you think about the questions that you just answered and the
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things that you just learned and really try to pull out what is obviously important, the concepts that
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are probably going to be tested on the exam. Again, these are the concepts that your review course is
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obviously trying to teach you in preparation for the exam based off of the questions
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So let's just write down a few pillar topics. You don't have to write down a ton. You'll probably have like two, three, four each time you have a good study session
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So let's take a second and think about it. So first off, the donnie takes on the donor's basis
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adjusted basis and the donor's holding period when they are gifted the asset
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Okay, so they take on the donor's adjusted basis and the donor's holding period
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This means that if the donor held the asset for more than one year, even if the donnie
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sold it right away would still be a long-term game. Okay, and then let's go over the last
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rule that we just learned. However, in situations where the selling price is less than the
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adjusted basis of the donor, there are two things that can happen. If the selling price, if the selling
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price is less than the adjusted basis, but greater than the fair market value at the date of the
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gift, then there is no gain or loss. If the selling price is less than the adjusted basis
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and less than the fair market value, then the fair market value is used at the fair market value is used
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as the basis for calculating the loss. Okay. All right. So those are the pillar topics that we pulled from these five questions that we did
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Again, this is the super fast CPA strategy, diving straight into questions, using them as a learning tool, not necessarily using them just to test yourself
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Because what are you going to be doing on test day? You're going to be doing questions. So you may as well get good at learning how to learn from the questions and getting quick at answering questions as well
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as time goes on. So I hope you liked this video. Just a reminder, make sure you go watch the
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Superfast CPA free webinar at SuperfastCPA.com. We go over the six key ingredients to passing the
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CPA exam. And if you liked this video, if you like the idea of going through the questions first
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again, we have the Super Fast CPA app where we have mini quizzes, we have review notes, and we have
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audio notes that you can access on the fly as you're going throughout your day. So you can pull out
15:47
your phone when you got a text message, hurry and do a five-question mini-quiz where the questions are
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simplified and the numbers are rounded so you can do it quickly, but you're still getting
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refreshers and learning throughout the day by using the mini-quises. So again, if you liked this
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definitely check out the webinar and the Super Fast CPA app. Thanks for watching, and I will see you
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in the next one