Question

Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax consequences, what is Russett's basis in the equipment

Answer 1

After ignoring the gift tax basis, the Russett's basis in the equipment is equal to $31,000

Step-by-step explanation:

For answering this question it is important that we have knowledge of the IRS publication 555, according to which we can take out the donee basis in the property ( in this case donee is Russett's ) in the situation when market value of the property is equal to or greater than the donors ( Bluff ) adjusted basis.

Then the donee basis will be equal to the donors adjusted basis of property.

In this case we will first take out donors ( bluff ) adjusted basis for equipment,

= $35,000(purchase value) + $1000(improvement) - $5000 (depreciation)

= $31,000

So here we can say that donors adjusted basis is less than market value , so in this case the russetts basis will be equal to bluff adjusted basis for property which is equal to $31,000.