REG Practice Questions: Calculating the Basis of Gifted or Inherited Assets

Name: REG Practice Questions: Calculating the Basis of Gifted or Inherited Assets | Humix Video
Uploaded: 2024-05-03T19:47:09+00:00
Duration: 16 min 25 s

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Hi, I'm Logan with Superfast CPA, and in today's video, we're going to be covering how to calculate the tax basis of property received as a gift or as an inheritance from a decedent
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But we're going to be doing it in Super Fast CPA fashion, which is going through questions to learn the material
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If this is the first thing you're seeing from us, our study approach is mainly focused on doing multiple choice questions to learn the material instead of spending time watching videos, reading notes, and things like that
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Be sure to check out our free one-hour training webinar at superfast cpa.com
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We go over the six key ingredients to passing the CPA exam. The link will be in the description of this video
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One more thing about this video, we'll only be going over five questions in this video, but members of Superfast CPA will be able to access the full video that has 10 questions
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All right, with that said, let's go ahead and get into some questions. All right, question one
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In year five, a taxpayer transferred a 50% undivided interest in Green Acres Vineyard to their son
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The property was co-owned as joint tenants with rights of survivorship. In year 15, the taxpayer passed away and the remaining 50% interest in the vineyard was bequeathed to the sun
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The original purchase price paid by the taxpayer for the vineyard in year one was $60,000
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and the vineyard's fair market value at the taxpayer's passing was $150,000
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No alternate valuation date was chosen. What is the sun's basis in Green Acres Vineyard after the taxpayer's death
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All right, before we go into this, go ahead and pause the video
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make sure you understand what this is asking, kind of, you know, understand what the question is
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And then once you're done with that, go ahead and start the video again, and we'll go ahead and look
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in the answers. Go ahead and start the video again, and we'll look at the answer. All right
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So the answer is D, $105,000. So let's try to learn from this explanation
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The sun's basis in Greenacre's Vineyard after the taxpayer's death is $105,000
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Okay, why? This consists of the $30,000 carryover basis for the 50% interest gifted in year 5
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so 50% of the original 60,000 purchase price, plus the $75,000 stepped up basis for the 50% for the 50% interest inherited in year 15
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So 50% of the $150,000 fair market value at the taxpayer's death
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Okay. The basis in property received as a gift is typically the donor's adjusted basis, which in this case is $30,000 for the 50% interest
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The basis in property acquired through the inheritance is the fair market value at the date of the decedent's death
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if no alternate valuation date is chosen, which in this case is $75,000 for the remaining 50% interest
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Okay. So right away, we learn a lot from just this one question
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So first off, it seems like when property is gifted, it's typically given as the donor's adjusted basis
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Like, that's the basis that is carried over to the donee, the person who received the gift. Okay
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And it looks like when they inherit the rest of the interest in the vineyard, they get the
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that they get that step up as well based off of their ownership interest. So they first get the 50%
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which is from the $60,000, and then they also get the 50% from the stepped up basis when the
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taxpayer passes away. Okay, so we do half of 60,000 and half of 70, sorry, half of 150,000, so 75,000 plus
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30,000 equals 105,000. Okay, so right there, we learned a lot from just that one question
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and so right there we learned a lot from just one question. And that's something that you'll learn with this process
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with the Super Fast CPA process, is a lot of times there's a lot of information at the beginning
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when you're trying to learn from just the questions, but you can learn a lot from just one question
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and your knowledge will build upon itself as we go through the following questions
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So we learned from that. Let's go ahead and go to the next question and build on that knowledge
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All right, here's the next question. A parent transferred a portfolio of stocks
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to their daughter with an adjusted basis of $12,000 and a fair market value of $11,000 at the time of the gift
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Subsequently, the daughter sold the stocks for $8,000. What is the daughter's basis for the
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stocks sold So we learned from the previous question that usually they take on the adjusted basis that the donor had But you know is there going to be something that changes it because they sold the stock
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That's what we're going to learn. So take a second. Make sure you understand the question. Pause if you need to
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And now we're going to go into the answer. Okay. So the daughter's basis for the stocks sold is 11,000, which is the fair market value
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Okay, so this is different than what we just learned. So let's see why this is different
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When calculating the basis of gifted property that is later sold for a price
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that is less than the fair market value at the time of the gift, there are specific rules to follow
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Okay. So right there, it normally is the adjusted basis, but if they later sell it for a price
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that's less than the fair market value, then there's different rules. So let's read those rules
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If the selling price is greater than the donor's adjusted basis, the donese basis is the same
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as the donor's adjusted basis at the time of the gift. Okay. Not applicable here as the selling price
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of $8,000 is less than the adjusted basis of the $12,000. And this seems to the same as the same as the seems like it would be a situation where there would be a gain to me. You know, if they sold it for
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so they got the donor's adjusted basis, like let's say they had 12,000 and then they sold it for 15,000
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That would seem like that that would seem like the basis would be 12,000 and then there would be a
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$3,000 gain. But that's not what happened here. If the selling price is less than the donor's
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adjusted basis, but greater than the fair market value at the time of the gift, then the donor's basis
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is the selling price, meaning there is no gain or loss. Okay. So if it's between the
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adjusted basis and the fair market value, the selling price, I mean, then there's no gain or loss
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But that would not be applicable here as the selling price is less than both the adjusted basis
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and the fair market value because it's $8,000. If the selling price is less than the fair market
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value at the time of the gift, and I get, and you know, assuming also less than the adjusted basis
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the loss is recognized using the fair market value as the basis. Therefore, in this case, since the
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daughter sold the stocks for $8,000, which is less than both the adjusted basis and the fair market
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value at the time of the gift, her basis for determining the loss is the fair market value
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which is $11,000. So the basis is $11,000, and she sold it for $8,000. So that would mean that she
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had a $3,000 loss. But that's not what it's asking. It's asking what the basis was
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Okay, so right away, we learned a lot again from just one question. And maybe later in the video
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we can come back and make a little rule for ourselves to kind of remember how to do this in the
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future. Okay, but basically it looks like there's three different situations when you sell stock
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or when you sell property that you received as a gift. Like there, you could have three different
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situations. Either it could be greater than the adjusted basis. So it would probably be a gain. It could be
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in between the adjusted basis and the fair market value or it could be less than the fair market value, which would be a loss. All right. So let's go ahead and move on to the next question and see if we
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can build on this. And like I said, towards the end of the video, we're going to, and like I said
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we're going to kind of put together the main topics that we've learned from doing these questions
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So let's go on to the next question. Okay, here's the next question. In the current year
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Alex sold a piece of commercial real estate acquired from his father's estate. The fair market
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value of the property at the time of his father's death was $300,000. And this was also Alex's
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basis in the property. Alex's father had originally purchased the property for $120,000
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Alex sold the property for $250,000 in the year his father passed away. What is Alex's
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gain or loss on the sale. Okay, let's take a pause. If you need to, make sure you understand the question
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and then let's go ahead and look at the answer. As typical for a taxpayer's basis in inherited property
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Alex's basis in the commercial real estate is the fair market value at the date of his father's death
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Hmm. Okay so right away inherited property is different than gifted property because we were learning up here above with up above with the second question that when there a gift it typically the adjusted basis of the donor
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But it looks like with inherited property, it's the fair market value at the date of the death
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It seems like that's a step up. Like they stepped up the basis, even though it was $120,000 when he bought it, it gets stepped up to Alex's basis, which is $300,000
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Because the property was inherited, the holding period is considered to be long term, regardless
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of the actual duration Alex held the property. Because the property was inherited, the holding period is considered to be long term
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regardless of the actual duration Alex held the property. Okay, that's another thing we're learning there
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Since Alex sold the property for $250,000, he realizes a loss of $50,000
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Makes sense. And this loss is classified as long term. Okay. So right there, we learned a big difference between inherited and gifted property
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So with inherited property, there is, it looks like that step up to fair market value at the date of the death
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So that brings it up to $300,000 for Alex's basis. And then when he sold it for $250,000, of course, that's a loss compared to his $300,000 basis
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And it's long term because it was inherited. And it looks like typically for inherited property, it's a long term, gain or loss
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It's always a good idea to look at the wrong questions as well or the wrong answers as well
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because that might give you a little bit more information. Yep. Okay, so these were all based off of
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even if they were based on the correct basis, they either had the wrong term
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or this one right here was based off of the original basis
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of $120,000 instead of the stepped up $300,000 basis. Okay, already learning a lot about inherited property
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as well as gifted property. Let's go to the next one and see if we can learn some more. Okay, here's the next one
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Anderson, a single parent and guardian of his 15-year-old child, filed his year-10 federal income tax return
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He provided the following details to the CPA who was preparing his tax documents. In March, year 10, Anderson's father transferred to him 200 shares of a publicly traded corporation
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The donor's basis for these shares purchased in year two was $8,000, and the fair market value on the date of the gift was $6,000
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Anderson then sold the shares in August, year 10, for $7,500. $200. His father paid no gift tax for the transfer. What is Anderson's reportable gain or loss on the year 10 tax return for the sale of the 200 shares of stock? All right, take a second. Make sure you understand what's going on there. There's a lot of different numbers here. And then we'll look at the answer. Okay, let's look at the answer. The answer is zero. Okay, let's see why. The basis of property received as a gift is dependent on the sale price in relation to the donor's basis and a fair market value at the time of the gift. If the sale results in a price higher than the donor's basis, the donor's basis, the donor's basis
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is used at the basis. If the sale price is lower than the fair market value at the time of the gift
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then the fair market value is used as the basis. If the sale price is in between the donor's basis and the fair market value
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there is no gain or loss. Okay. So since Anderson sold the shares for $7,500, which is between the donors basis of $8,000
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and the fair market value of $6,000, he realizes neither gain nor loss
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Okay. That continues something that we learned in the first question, or was it the second question
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where depending on how much the sales price is, that determines the basis that you use
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for that sale. And then let's read this year. Okay. So that just builds on something that we learned before
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There's those three different situations when there's a sale of a gift
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And it could be a gain, it could be no gain or loss, or it could be a loss
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Okay, let's go ahead and go to the next question. All right. Cedar Corp purchased manufacturing equipment for business operations at a cost of $45,000
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and subsequently spent $2,000 on upgrades. After accounting for depreciation of $6,000
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Cedar Corp donated the equipment to Pine LLC for business purposes. At the time of the donation, the equipment had a fair market value of $40,000
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Assuming that the gift tax consequences are disregarded what is Pine LLC basis in the equipment Okay so this is different than before because we either dealt with inherited property
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or we've dealt with individuals giving things, but we've never dealt with a business giving
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things to another business. So take a second, make sure you understand, and then let's go
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and go to the next question. Then let's go ahead and go to the answer. Okay, 41,000
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And that probably, just by seeing that, I don't even, I don't even know if I need to read this. $45,000 plus $2,000
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That's going to increase that. So $47,000 less $6,000 of depreciation. That's the basis
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Okay. And then for gift tax, when it comes to gift, when it comes to gifting things
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we learned above that it's typically the adjusted basis of the donor that is transferred to the donee
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So that makes sense why it's $41,000. Let's go ahead and read this and just kind of confirm what I just said there
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The first step is to calculate the donor's adjusted basis in the asset at the time of the donation
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Initially, Cedar Corp's basis is the cost of the equipment plus the cost of upgrades, totaling $47,000
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Yep. After accounting for depreciation, the adjusted basis is reduced by $6,000
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Yep. Fair market value at the time is $40,000, which is less than the donor's adjusted basis
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Therefore, their adjusted basis, or I guess, therefore Pinellus's basis is the basis that Cedar Corp had when it gave
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the therefore pine l lsie's basis in the donated equipment is forty one thousand dollars which is the
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donor's adjusted basis since property received as a donation generally retains the donor's
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adjusted basis all right let's go ahead and read the rest choice b is incorrect because it
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suggests that pine l l c's basis is the fair market value which we know is not right incorrect
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because choice c is incorrect because it adds the initial purchase price without accounting for
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depreciation that makes sense why that's wrong Okay. All right. So we learned a lot from just five questions. Before we move on, let's go ahead and do another part of the Superfast CPA process, which is putting together pillar topics. Now, pillar topics are basically things that as you went through the questions, you noticed that these were the themes, these were the things that you were supposed to learn based off of the questions and the things that you saw. So let's go ahead and write out a few pillar topics before we move on. So first pillar topic for
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gifted property, typically basis is the adjusted basis from the donor, then sells a gift later
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At that point, it may be different based on the selling price
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Okay, so that's one thing. And if you wanted to, you could write that out in even more detail, you know, talking about how if it's greater than the adjusted basis, the selling price I mean, then it would be a gain
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If the selling price was between the adjusted basis and the fair market value, it would be no gain or loss
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If it was under the fair market value, then it would be a loss
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So you could write that out a little bit as well. But that's kind of the gist of the pillar topic right there
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And then with the inherited property, typically the basis is stepped up at the date of debt for the beneficiary
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All right. So those are a couple things, a couple pillar topics that it was obvious that we were supposed to learn from doing these five questions
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All right, that's it for this video. As a reminder, with this free video, you saw me do five questions, but members of Super Fast EPA will be able to
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see the full video where I go over 10 questions. If you liked this video or found it helpful
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be sure to look out for our other videos that will be coming up, teaching things like this
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And as a reminder, the link to the free training webinar will be down in the description of this
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video. Be sure to go watch that. It is one hour that will save you months and months of struggling
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with the CPA exam. Again, I'm Logan, and I'll see you in the next one

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