Question

2. Arthur owns a tract of undeveloped land (adjusted basis of $145,000) that he sells to his son, Ned, for its fair market value of $105,000. What is Arthur’s recognized gain or loss? What is Ned’s basis in the land?

Answer 1

There should not be any recognized gain or loss of “A” because of the following reasons:

Reason 1) There is no gain because the fair market value ($105,000) is lower than the property’s adjusted basis ($145,000) – selling price is lower than the cost price.

Reason 2) Although there is a loss of (145,000 – 105,000 =) $40,000 because of increasing adjusted basis from the fair market value, such loss must not be recognized since parties are related – father and son relationship.

Answer: Recognized gain or loss is $0.

Answer: N’s basis would be the fair market value, $105,000