Question

Monica sells a parcel of land to her son, Elbert, for $90,000. Monica's adjusted basis is $100,000. Three years later, Elbert gives the land to his fiancée, Karen. At that date, the land is worth $104,000. No gift tax is paid. Since Elbert is going to be stationed in the U.S. Army in Germany for 3 years, they do not plan on being married until his tour is completed. Six months after receiving the land, Karen sells it for $110,000. At the same time, Karen sends Elbert a "Dear John" email.

What is Karen's realized and recognized gain or loss on the sale of the land?

A)Realized Gain: $10,000; Recognized Gain: $10,000
B)Realized Gain: $6,000; Recognized Gain: $6,000
C)Realized Gain: $0; Recognized Gain: $0
D)Realized Gain: $10,000; Recognized Loss: $4,000

Answer 1

Karen's realized and recognized gain on the sale of the land is $10,000.

This correct answer is B.

Step-by-step explanation:

Karen's realized gain on the sale of the land is $10,000 and her recognized gain is also $10,000.

Realized gain is the difference between the selling price and the adjusted basis of the property. In this case, Karen sells the land for $110,000, which is $6,000 more than what Elbert gave it to her for ($104,000 - $90,000). So the realized gain is $6,000.

However, since Karen received the land as a gift from Elbert, the recognized gain is calculated based on Elbert's adjusted basis of $100,000. Since the selling price of the land is higher than Elbert's adjusted basis, the recognized gain is equal to the realized gain of $6,000.

This correct answer is B.