Question

Oliver sells property with an adjusted basis of $26,000 to his son for $18,000. His son subsequently sells the property to his sister for $18,000. Two years later, the sister sells the property to Cedric, an unrelated party, for $28,000. What is the sister's recognized gain or loss on the sale of the property?

A) The sister incurs a recognized gain of $2,000.

B) The sister incurs a recognized loss of $2,000.

C) The sister incurs no recognized gain or loss.

D) The sister incurs a recognized loss of $8,000.

Answer 1

The sister recognizes a gain of $2,000 based on the adjusted basis of $26,000 she inherited from her brother when she sold the property to Cedric for $28,000.

Step-by-step explanation:

The sister's recognized gain on the sale of the property to Cedric, an unrelated party, for $28,000 would be $2,000. Since she originally purchased the property from her brother for $18,000 and sold it for $28,000, she realized a gain. However, because the property was sold to her at a loss by her brother (he sold it for less than its adjusted basis of $26,000), the property's basis for determining gain on her subsequent sale is the same as it would be in her brother's hands at the time of the transfer, except for any adjustment allowed for periods after such transfer. Therefore, the basis of the property in the sister's hands for determining gain on the sale remained at $26,000, not the $18,000 at which she acquired it.

Hence, when subtracting her brother's adjusted basis (which became her basis) of $26,000 from the sale price to Cedric of $28,000, the sister's gain is computed to be $2,000. This is the amount she would recognize for tax purposes assuming no other adjustments or exclusions apply.