Question

Joseph converts a building (adjusted basis of $50,000 and fair market value of $40,000) from personal use to business use. Justin receives a building with a $40,000 fair market value ($50,000 donor's adjusted basis) from his mother as a gift. Discuss the tax consequences with respect to Joseph's and Justin's adjusted basis.

A) Joseph incurs a realized loss on the conversion, and Justin receives the building with a basis equal to the donor's adjusted basis.
B) Joseph incurs a realized loss on the conversion, and Justin receives the building with a basis equal to the fair market value.
C) Joseph incurs a realized gain on the conversion, and Justin receives the building with a basis equal to the donor's adjusted basis.
D) Joseph incurs a realized gain on the conversion, and Justin receives the building with a basis equal to the fair market value.

Answer 1

Joseph incurs a realized loss on the conversion, and Justin receives the building with a basis equal to the donor's adjusted basis.

Step-by-step explanation:

The tax consequences with respect to Joseph's and Justin's adjusted basis are as follows:

A) Joseph incurs a realized loss on the conversion, and Justin receives the building with a basis equal to the donor's adjusted basis.

Joseph converts a building from personal use to business use, which results in a realized loss. The adjusted basis of the building is $50,000, but the fair market value is now $40,000. Since the fair market value is lower than the adjusted basis, there is a realized loss for Joseph.

When Justin receives the building as a gift, his basis is determined by the donor's adjusted basis, which is $50,000. Therefore, Justin receives the building with a basis equal to the donor's adjusted basis.