Question

E received a gold necklace as a gift from her grandmother this year. The necklace had cost $18,000 twenty years ago. The necklace was worth $40,000 on the date of the gift (net of the exclusion of $14,000), and her grandmother paid gift taxes of $840. What is E’s basis in the necklace?
a.         $18,000
b.         $18,756
c.         $18,462
d.         $40,000

Answer 1

Dear Friend,

If the Fair Market Value of the gift equals or exceeds the Donor's Adjusted basis at the time of gift, the basis of the gift in the hands of recipient will be taken as Basis plus a part of the gift tax paid by the donor if any.

In such a case, New Basis formulae would be as follows:

New Basis = Original Basis + {(Appreciation in Gift / Fair Market Value)* Gift Tax}

Here,

i. Original Basis = $ 18,000

ii. Appreciation in Gift = Fair Market Value - Original Basis or Cost by Donor

= $ 40,000 - $ 18,000

= $ 22,000

iii. Fair Market Value = $ 40,000

iv. Gift Tax Paid = $ 840

So, Applying above values in the Formulae, it comes as follows

New Basis = $ 18,000 + {($ 22,000 / $ 40,000) * $ 840}

= $ 18,000 + $ 462

= $ 18,462

Hence, Correct Answer is Option - C ($ 18,462) must be taken in to Account.