Basis of Property

Question 1

Wilson owns stock in two companies. Each investment cost $10,000. Both investments drop in value to $9,000. At that point, he gives one investment to Adam and the other investment to Sara. Adam’s investment goes up in value to $10,400 and he sells it. Sara’s investment goes down in value to $8,500 and she sells it. What are the tax effects created by these sales?
• Adam has a $400 taxable gain and Sara has a $1,500 taxable loss
• Adam has a $1,400 taxable gain and Sara has a $500 taxable loss.
• Adam has a $400 taxable gain and Sara has a $500 taxable loss.
• Adam has a $1,400 taxable gain and Sara has a $1,500 taxable loss.

Answer 1

Adam has a $400 taxable gain and Sara has a $500 taxable loss

If: If at the time you received the gift, the FMV of the property was MORE than the donor’s basis, you must use the donor’s basis to figure your gain or loss. If at the time you received the gift,

xxxxxthe FMV of the property was LESS than the donor’s basis: (a) if there is a gain on sale, you must use the donor’s basis as your basis, (b) if there is a loss on the sale, you must use the FMV as your basis.

Gain
ADAM 10,400sale-Donor Basis 10,000

Loss Sara
FMV 9000-8500=500

Question 2

In 2017, Billy's father deeded him 400 acres of land. The fair market value (FMV) on the date of the transfer was $350,000. His father had paid $40,000 for the land. No gift tax was paid on the transfer. When Billy's father died six months later, the fair market value of the land was $400,000. What is Billy's basis in the 400 acres? Mal
•	 $400,000 
•	 $350,000 
•	 $40,000 
•	 $260,000

Answer 2

40,000

FMV at date of gift exceeds donor’s adjusted basis so Billy’s basis is the donor’s adjusted basis of $40,000 since no gift taxes were paid

Question 3

Jake bought four shares of common stock for $200. Later the corporation distributed a share of preferred stock for every two shares of common. At the date of distribution the common stock had a FMV of $60 per share and preferred stock had a FMV of $40 per share. What is Jake's basis per share of the common and preferred stock after the nontaxable stock dividend?MAL
•	 $60 common; $40 preferred.
•	 $37.50 common; $25 preferred.
•	 $33.33 common; $33.34 preferred.
•	 $50 common; $0 preferred.

Answer 3

$37.50 common; $25 preferred.
• Jake must allocate a portion of his $200 basis in the common stock to the preferred stock, according to the relative value on the date of distribution. On the date of distribution, the four shares of common stock are valued at $240 and the two shares of preferred stock are valued at $80, totaling $320.
Base =200

Common
The common represents 75% of the total value
Base 200x.75=150 Value Common 240/320=.75
150/4comon=37.50

Prefered 80/320=25% of total value
200x.25=50.00
50/2=25.00