M1 Basis and Holding Period of Assets Flashcards
MCQ-01853
Fred Berk bought a plot of land with a cash payment of $40,000 and a mortgage of $50,000. In addition, Berk paid $200 for a title insurance policy. Berk’s basis in this land is:
$90,200
$90,200 is Berk’s basis in the land.
The basis of the property acquired will be the property’s cost consisting of the amount of cash paid plus any amount of related debt assumed. Cost will be adjusted to reflect any additional costs incurred in purchasing the property.
Cash payment 40,000
Related debt 50,000
Purchase price 90,000
Add: Cost of title policy 200
Total basis in the land 90,200
MCQ-08204
Simmons gives her child a gift of publicly traded stock with a basis of $40,000 and a fair market value of $30,000. No gift tax is paid. The child subsequently sells the stock for $36,000. What is the child’s recognized gain or loss, if any?
No gain or loss
This situation falls into the exception of the gift tax basis rule because the FMV at date of gift is lower than the donor’s basis. The donee then sold the stock at a price less than the donor’s rollover cost basis but higher than the FMV on date of gift. In this instance, the basis is equal to the sales price. Therefore, there is no gain or loss on the sale.
MCQ-11066
Parent gave securities with an adjusted basis of $10,000 and fair market value of $9,000 to a child. Later the child sold the securities for $7,000. What is the child’s basis for the securities sold?
$9,000
Gifted property generally retains the cost basis it had in the hands of the donor at the time of the gift. An exception applies, however, if the fair market value at the date of the gift is lower than the cost basis. In such situations, the donee’s basis depends on the donee’s future selling price of the asset. If the sales price exceeds the donor’s cost basis, the donee’s basis equals the donor’s cost basis. If the sales price is less than the donor’s cost basis but is greater than the fair
market value at gift, the donor’s basis equals the sales price. If the sales price is less than donor’s cost basis and fair market value, the donee’s basis equals fair market value, which is applicable to this situation. The child’s basis is $9,000 (fair market value at date of the gift) because the sales price
of $7,000 is less than both the adjusted basis of $10,000 and the fair market value of $9,000.
MCQ-14657
Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift
tax consequences, what is Russett’s basis in the equipment?
$31,000
The first step is to determine the donor’s basis in the asset at the gift date. In this case, the basis is $31,000 ($35,000 + $1,000 − $5,000). The fair market value of the asset is $32,000 at the date of gift, which is greater than the donor’s basis. Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. Thus, Russett’s basis in the equipment is $31,000.
MCQ-14925
A taxpayer received a painting valued at $8,000 as a gift. The donor purchased the painting a year earlier for $4,500 and paid no gift tax on the transfer. Nine months later, the taxpayer sold the painting for $9,000. What is the amount and classification of the capital gain?
$4,500 long-term
The taxpayer has a $4,500 long-term capital gain. The basis of property acquired as a gift is the same as the basis in the hands of the donor, which is $4,500 in this situation. The donor’s holding period of one year also rolls over. The total holding period is more than one year, so the gain recognized is long-term.
Sales price $9,000
Rollover cost basis (4,500)
Total Long-term capital gain $4,500
MCQ-01653
Smith made a gift of property to Thompson. Smith’s basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson’s gain on the disposition?
$1,300
The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor’s basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor’s basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is:
Amount realized 2,500
Basis (1,200)
Total Gain recognized 1,300
MCQ-01909
Alice gifted stock to her son, Bob, in Year 5. Alice bought the stock in Year 1 for $8,300. The value of the stock on the date of gift was $13,400. Bob sold the stock in Year 7 for $15,800. What is Bob’s recognized gain or loss on the sale in Year 7?
$7,500 gain
The general rule for the basis of an asset acquired by gift is a carryover of the donor’s basis. So Bob’s basis is the $8,300 carryover from Alice. Therefore, his recognized gain is $7,500 ($15,800 – $8,300).
MCQ-04752
Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of
Arden stock was $62 per share. On February 1, Year 3, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of Arden sold?
$5,000
The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original share over both the original shares and the new shares received
resulting in the same total basis, but a lower basis per share of stock held. Therefore, Greller’s total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares). Therefore, his basis per share goes from $100/share ($10,000/100) to $50/share ($10,000/200). Consequently, his basis in 100 share is 100 x $50 = $5,000.
MCQ-04759
Allen owns 100 shares of Prime Corp., a publicly traded company, which Allen purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Prime stock was $62 per share. On February 1, Year 3, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share. What amount should Allen recognize as long-term capital gain income on his Form 1040, U.S. Individual Income Tax Return, for Year 3?
$1,500
The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original shares over both the original shares and the new shares received,
resulting in the same total basis but a lower basis per share of stock held. Therefore, Allen’s total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares). Therefore, his basis per share decreases from $100/share ($10,000/100) to $50/share ($10,000/200). Consequently, his basis in the 100 shares sold is 100 x $50 = $5,000. Calculate his gain as follows:
Amount realized ($65 x 100) $6,500
Adjusted basis (5,000 - calculated above)(5,000)
Total realized & recognized gain $1,500
MCQ-05274
Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Boone gave 100 shares of the stock to another of Carter’s relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share. What was Dixon’s basis in the 100 shares of stock when acquired on June 1?
$5,000
Carter’s investment in the stock was $50 per share when he died. Upon Carter’s death, the stock received a step-up in basis to the fair market value at the date of death (or six months later, if the alternate lower valuation date was elected). Therefore, the stock’s basis was $100 per share when it was transferred to Boone. Further, regardless of how long Carter owned the stock (i.e., it could have only been owned for one day), it was automatically deemed long-term property upon Carter’s death. So, Boone had 100 shares of stock at a basis of $100/share when Boone received the inheritance. Then, there was a 2-for-1 stock split on April 1 of the following year. This transaction caused Boone to now have double the amount of shares (or, 200 shares) at half the basis per share ($50/share). [Note that the total basis remains unchanged (i.e., $100 × 100 shares = $10,000 and $50 × 200 shares = $10,000).] When Boone gifted the stock to Dixon (note that it would not have mattered if Dixon had not been a relative), the donee (Dixon) received the stock at the carryover basis of the donor (Boone). The 100 shares gifted to Dixon were shares from after the stock split; therefore, they have a basis of $50 per share, or a total basis of $5,000 for the 100 shares. [Note that Boone still has 100 shares at a basis of $50 as well.]
MCQ-06572
Parrot received land as a gift with a fair market value of $5,000. The land was purchased by the donor for $8,000. The land is sold for $6,000. What amount of gain should be reported?
$0
In general, property acquired as a gift retains the cost basis it had in the hands of the donor. However, if the fair market value of the property at the time of the gift is lower than the
cost basis in the hands of the donor (as in this case), the basis to the donee depends on the donee’s future selling price of the property, as follows: If the future selling price is higher than the donor’s cost basis, the donee’s basis is the donor’s
cost basis. If the future selling price is lower than the fair market value of the property at the time of the gift, the donee’s basis is the fair market value of the property at the time of the gift. If the future selling price is lower than the donor’s cost basis but higher than the fair market value of the property at the time of gift, neither gain nor loss is recognized by the donee on the sale of the property. In this problem, the donee’s selling price of $6,000 is less than the donor’s cost basis of $8,000 but more than the fair market value of the property at the time of the gift of $5,000, so the donee does not recognize a gain or a loss on the sale of the property.
MCQ-01736
Hall, a divorced person and custodian of her 12-year-old child, filed her Year 9 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her Year 9 return:
In June, Year 9, Hall’s mother gifted her 100 shares of a listed stock. The donor’s basis for this stock, which she bought in Year 1, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July, Year 9 for $3,500. The donor paid no gift tax. What was Hall’s reportable gain or loss in Year 9 on the sale of the 100 shares of stock gifted to her?
$0
Rule: The basis of property received as a gift in the hands of the donee depends on whether the selling price of the property is more or less than the basis for gain or loss. If the property is sold at a gain, the basis to the donee is the same as it would be in the hands of the donor. If the property is sold at a loss, the basis to the donee is the same as it would be in the hands of the donor or the FV of the property at the date of the gift, whichever is lower. In some cases, such as in this fact situation, there is neither gain nor loss on the sale of the gift, because the selling price is less than the basis for gain and more than the basis for loss.
MCQ-01889
If the executor of a decedent’s estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent’s death?
6
The alternate valuation date is the earlier of the date of distribution or six months after the date of death
MCQ-01669
If the executor of a decedent’s estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent’s death?
6
Rule: The executor can elect to use an alternate valuation date rather than the decedent’s date of death to value the property included in the gross estate. The alternate date is generally six months after the decedent’s death or the earlier date of sale or distribution.
Note: The valuation of the assets in an estate affects the recipient as basis of the inherited assets
MCQ-06976
A beneficiary acquired property from a decedent. The fair market value at the date of the decedent’s death was $100,000. The decedent had paid $130,000 for the property. Estate taxes attributed to the property were $2,000. The beneficiary sold the property two years after receipt from the estate. What is the basis of the property for the beneficiary?
$100,000
The basis of inherited property to the beneficiary is the fair market value of the property at the date of the decedent’s death (or the alternate valuation date, if the alternate valuation
date is used for determining the value of the estate for estate tax purposes).
