Question

1. On April 1, June Moon inherited land from her uncle (uncle basis $10,000; fmv $20,000); she sold the land six months later for $22,000. Explain and show calculation, including LT or ST.

2. On April 1, June Moon was given land by her aunt (aunt basis $20,000; fmv $25,000); she sold the land six months later for $22,000. Explain and show calculation, including LT or ST.

Answer 1

(1) In case of inherited property, this is done using the stepped up basis rule, for an individual who inherits a capital asset, the cost basis is stepped up to its fair market value of the property at the time of the inheritance. When eventually sold, the capit gain or loss is only the difference in value from this stepped up basis. Increase in value that occured before the inheritance is never taxed.

Therefore June Moon who inherits land from her uncle and later sold within a year would have a short term Capital Gain :

Sales price - fair value at the time of inheritance=

$ 22,000 - $ 20,000= $ 2,000