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REG CPA Practice Questions: Capital Gains from the Sale of Inherited 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 inherited assets/assets received from a decedent. 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-inherited-assets/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:47 Question 1: Learning the Basics of Capital Gains from Sales of an Inheritance 03:12 Question 2: Applying the Basics 04:41 Question 3: Learning about the Alternate Valuation Date 06:33 Question 4: Calculating the Capital Gain from the Sale of an Asset Received from a Decedent 07:43 Question 5: Applying the Capital Loss Limit 10:24 Pillar Topics
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Hi, I'm Logan. Welcome to another reg walk-through video. In today's video, we're going to be going
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over calculating capital gains on the sale of assets received from a decedent. But we're going to be
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doing it the Superfast CPA way, which is diving straight into some questions to learn the material
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Now, if you don't know much about our strategies, that's one of our big strategies. And if you want to
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learn more, make sure you go to superfast CPA.com to watch our free one-hour webinar training
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where we go over the six key ingredients to passing the CPA exam. The link will be in the
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description, it'll look like this, so make sure you go watch that. Also, if you like doing questions
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to learn the material, make sure you check out our Super Fast CPA app where we have mini quizzes
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audio notes, and review notes that you can use on the go throughout your day. With that said
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let's dive straight into some questions to learn how to calculate these gains. All right
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here's the first question. Jordan inherited a condo from his uncle's estate this year
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The condo was sold by Jordan for $480,000 shortly after coming into possession of it. At the time of
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the uncle's death, the fair market value of the condo was determined to be $430,000, although the
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uncle's original purchase price for the condo was $390,000. For the purpose of calculating the
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gain or loss to be reported on Jordan's income tax return, select the correct answer from the
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following options. All right, so just a reminder, this is us trying to figure out how much of the
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capital gain will be included in an individual's gross income for their tax return. So that's
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the idea behind all of this is figuring out these capital gains for the gross income
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So if you don't know much about this, then that's okay. That's why we're going to dive straight into the answers
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Make sure you understand what the question is asking, and we're about to learn how this is different than maybe the other capital gains videos if you've watched those
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All right. So a $50,000 long-term capital gain. So let's learn why that's a $50,000 long-term capital gain
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When an individual inherits an asset, such as real estate, the basis of the asset for tax purposes is generally the fair market value at the time of the previous
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owner's death. This is often referred to as the step-up basis. In Jordan's case, the condo was
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valued at $430,000 when he inherited it. When he sold the condo for $480,000, he realized a gain
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of $50,000. For tax purposes, the gain on property acquired from a decedent is always treated
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as long-term, regardless of how long the inheritor held the property before selling it. This is because
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the tax code considers the holding period to have started on the date of the decedent's death. Therefore
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Jordan's gain on the sale of the inherited condo is a long-term capital gain. All right. So as you'll
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see in this video, this is a very simple and straightforward topic. Capital gains, when it comes to
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assets received from a decedent or basically an inheritance, the holding period is always
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considered long-term and the basis for the gain, or I guess it could be a loss, is the fair market
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value of the asset on the date of the decedent's death. There is one other date that can be chosen
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learn about that in a few questions, but that's the basic idea right there. You already, with just
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that one question you know almost everything about calculating capital gains from the sale of an asset from a decedent Let go ahead and go to the next question All right here the next question
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Taylor inherited a piece of artwork from her grandmother's collection this tax year
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The artwork was appraised at $120,000 at the time of her grandmother's passing
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The piece was originally purchased by her grandmother for $20,000. Four months after inheriting the artwork, Taylor sold it for $200,000
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What is the capital gain or loss that Taylor must? report on her tax return and how is it classified? All right. So we literally just learned most of the
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rules for how this works in the last question. So take a second, pause the video and see if you can
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already apply what you learned and get the correct answer. And when you're ready, come back and
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we'll look at the answer. All right. Let's go ahead and look at the next at the answer. $80,000 long-term capital game. In the case of inherited property such as artwork, the basis for
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the beneficiary is the fair market value, we already knew that, of the property at the decedent's date
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of death. Taylor's basis in the inherited artwork would be its appraised value at her grandmother's
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death, which is $120,000. Since Taylor sold the artwork for $200,000, she realized a gain of $80,000
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The $200,000 sales price, less the $120,000 stepped up basis. According to tax laws, the gain from the
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sale of inherited property is considered long term regardless of the actual duration. All right, so that's
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again, really straightforward. Always long term, whether it's a gain or a loss, and it
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uses the stepped-up basis at the date of the death. Again, there could be one other date that's used, and we will see that in the next question
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So let's go ahead and go to the next question. Morgan inherited a collection of rare books from a relative
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Jamie, who passed away on January 15th of the current year. The fair market value of the collection at the time of Jamie's death was $120,000
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However, the executor of the estate chose the alternate valuation date, which was July 15th
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at which time the fair market value of the rare books had decreased to $100,000
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Morgan sold the collection on December 1st of the same year for $130,000
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Determine the capital gain or loss that Morgan must report on their income tax return
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considering the alternate valuation date. Okay, so this is what I was talking about
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When it comes to selling an asset that was received as an inheritance or from a decedent
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you use the stepped up value, but you can use an alternate valuation date that's six months
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after the date of the death. So in this case, they chose to use the $100,000 fair market value instead of the fair market value on the date of the death
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And again, this is within six months. So January to February is one month to March to April, May, June, July
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So that's six months, exactly. All right. So with that knowledge, I bet you could also calculate this one
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So pause the video. Do it yourself. I guarantee you could get the right answer
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And then let's go ahead and look at the answer. Yep, $30,000 long-term capital gain. That makes sense because it's always going to be long-term, and since they're using the $100,000
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alternate valuation date to fair market value then it a gain We don even really need to read much of the explanation We could glance over it real quick when the executor of an estate elects the alternate valuation date the assets determined six months after the decedent death Morgan basis in the rare book collection would be the lower fair market value All right
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so again, pretty easy, not much difficulty in this topic specifically. Let's go ahead and go
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to the next question. Taylor inherited a vintage car from his grandfather who passed away on March 10th
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of the current year. The fair market value of the car at the time of his grandfather's death was
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$85,000, and this value remained the same six months after the death. The executor of the
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estate did not elect the alternate valuation date because there was no need to. Taylor then sold
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the car on September 30th of the same year for $95,000, determine the capital gain or loss
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that Taylor must report on his income tax return. All right, again, you could do this easily
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pause the video, do this problem, you could do it in your head, I bet, and when you're ready
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to come back, we'll look at the answer, but you probably already know the answer. $10,000 long-term capital gain. So in the absence of the election of the alternate valuation date
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they just use the basis or the fair market value as the basis on the date of the death of the decedent
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And then since it's an inherited property, it's always long-term. So again, very easy. We're going to
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throw one more thing in the last question here, and you'll already know this if you've watched
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the other two videos about how to treat capital losses when it comes to an individual's gross income
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let's go ahead and go to the last question. All right, here's the last question. In the current
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tax year, Elliot inherited a parcel of land from Elliot's cousin, whose estate was not subject to
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estate tax. Estate tax, by the way, not really covered in reg very much anymore, mainly covered
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in TCP, just like gift tax. Both of those are mainly covered in TCP at this point. The fair
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market value of the land at the time of the cousin's death on April 1st was $200,000, and Elliott
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decided not to use the alternate valuation date. Due to unexpected developments in the area, the value of the land decreased, and Elliot
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sold the land for $180,000 on November 15th of the same year
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What is the capital loss Elliott can report on their tax return for the year of the sale
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Again, if you don't know this rule, you might not know how this works, but there is something
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that happens with capital losses when it comes to ordinary income or gross income
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So take a second. See if you understand the question. If you do know the rule, then you'll know how to get this answer
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And if not, let's go ahead and go to the answer so we can learn how this works
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Okay, so it's a $3,000 long-term loss. So why is it only $3,000 when the total loss was $20,000
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Let's read more about it. Elliott's basis in the inherited land is its fair market value at the date of the cousin's death
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which is $200,000. They sold it for $180,000. So the loss is a long-term capital loss
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The Internal Revenue Code allows individuals to deduct capital losses against capital gains
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So in this situation, if Elliot had a long-term capital gain, he could net this loss
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against or even a short capital gain then some of the loss could go into that But in this situation since we don have that this is what going to happen If capital losses exceed capital gains which there no capital gains to compare against the excess loss can be deducted against ordinary income But this deduction
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is limited to $3,000 per year. Any loss exceeding this amount can be carried forward to future
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years. Therefore, although Elliott received a $20,000 long-term capital loss on the sale
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only $3,000 of this loss can be deducted from their ordinary income on the current year's tax return
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turn. The remaining $17,000 can be carried forward to subsequent years. All right. So that's one more rule. And again
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this applies to all capital losses when it comes to an individual's gross income. Only $3,000 of
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the capital loss can be counted against ordinary income. Although if there's gain to net the loss
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against, you need to do that before you consider the ordinary income limit. But again, if it turns out
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that there's enough of a loss that you can put it towards the ordinary income, only $3,000 of
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that can be taken and the remaining loss has to be carried forward to future years
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All right. Those are the five questions. Before we finish the video, we're going to do one more part of the super fast CPA strategy
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which is something called pillar topics. Now, if you don't know much about our strategy, again, we do the questions first
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And after you've done the questions or as you're doing the questions, you're going to notice
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topics and concepts that are obviously important according to your review course that you
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need to know when it comes to the exam. So what you do for pillar topics is you take what you
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learned and put it into a few phrases that will help you know what was most important from your
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studying. Let's go ahead and make some pillar topics. All right. When it comes to sales of assets
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received from a decedent, the term is always considered long term. Also
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the basis for gains and losses is the fair market value of the asset at the date on the date of the death of the decedent
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However, it can be elected to take an alternate valuation date six months after the date of death, and this can be the new fair market value basis
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Just like with all capital losses when it comes to gross income or an individual
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only $3,000 of a capital loss can be included in ordinary income
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All right, those are the pillar topics. I hope you found this video helpful. Make sure you go to superfastcpa.com if you liked this and watch our free one-hour webinar
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training where we teach the six key ingredients to passing the CPA exam
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And if you liked the questions first approach, we do have the super fast CPA app where you can access five question mini quizzes throughout the day to continually practice getting good at multiple choice questions and getting good at the material
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Thanks for watching and I'll see you in the next video
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