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Estate Finance Family Tax Plan Questions 1. Larry gives Jeff 1 share of David, Inc. stock...

Estate Finance Family Tax Plan Questions

1. Larry gives Jeff 1 share of David, Inc. stock on January 2, 2002 that has a basis of $10,000. On January 2, 2002, 1 share of David Inc. stock has a fair market value of $100,000. On January 2, 2004, Jeff sells the share to Leon for $200,000. How much income or loss does Jeff recognize on the sale? Analyze what Jeff's basis is in the stock and why.

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Answer #1

Cost basis means - an invested amount

Fair Market Value means - the amount of stock worth in the open market. In tax terms, if anyone gifts the stock to another person then the fair market value on the gifted date will be the cost basis.

Larry's basis in the stock is $10,000 and Jeff's basis in the stock is $100,000.

When Jeff sells the stock, he will be picking his basis i.e. $100,000.

Jeff income on sale of the stock will be $200,000-100,000 = $100,000.

Jeff's basis in the stock will be the value he received from Larry. As said above, if someone is given stock, then the fair market value of the stock on the day it is received will have tax implications on the sale date.

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