Final answer:
Transferring the property by inheritance would be preferable over a gift because it provides a step-up in basis and can help minimize tax liability in the future.
Step-by-step explanation:
In this case, the transfer of the property by inheritance would be preferable over a gift. By transferring the property through inheritance, Graham's nephew would receive a step-up in basis, which means that the fair market value of the property at the time of Graham's death would become the new basis for the nephew. This would be beneficial if the nephew were to sell the property in the future, as it would reduce the capital gains tax liability.
For example, if the property is inherited and later sold for $60,000, the nephew would only need to pay taxes on the gain of $10,000 ($60,000 - $50,000), assuming no other adjustments or expenses. However, if the property was gifted and later sold for $60,000, the nephew would need to pay taxes on the gain of $40,000 ($60,000 - $20,000).
Therefore, to minimize the tax liability and maximize the potential value of the property, it is preferable for the transfer to be by inheritance rather than by gift.