Question

Please prepare a short research "memo" responding to this client question:

Our client, H.G. Lucky received an acre of land as a gift several years ago. At the time of the gift the land had a FMV of $8,000 and the donor’s basis was $10,000. No events occurred to increase or decrease H.G.’s basis. H. would like to sell it for $7,000 so he can go on a River Cruise he saw on Masterpiece Theatre. His wife, has no interest in a River Cruise and thinks the land can be sold for $12,000. What is the net amount he will receive if he sells it for the $7,000 or if he sells it for what his wife believes it is worth, $12,000. Assume a 15% tax rate.

Answer 1

If the FMV of the property at the time of the gift was less than the donor's adjusted basis, your basis for loss on its sale or other disposition is its FMV at the time of the gift. So here, If he sells the land for $7000 - Net loss is $8000 - $7000 = $1000, there is loss, hence no tax. Net reciept will be $7000.

If the FMV of the property at the time of the gift was less than the donor's adjusted basis, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis. Here, If he sells the land for $12000 - Net profits is $12000-$10000 = $2000, receipt(after tax) will be 12000 - (15% of 2000) - $11,700