Question

Ryan received land and a building from Thom as a gift. Thom's adjusted basis and the fair market value at the date of the gift are as follows:

Asset Adjusted Basis FMV

Land $40,000 $35,000
Building 110,000 90,000

Thom paid 8,000 gift tax was paid on the transfer.

Required:
a. Determine Gerald’s adjusted basis for the land and building.
b. Assume instead that the fair market value of the land was $87,000 and that of the building was $120,000. Determine Gerald’s adjusted basis for the land and building.

Answer 1

a. Determine Gerald’s adjusted basis for the land and building.

Gerald's adjusted basis for gains:

• Land = $40,000
• Building = $110,000

Gerald's adjusted basis for loss:

• Land = $35,000
• Building = $90,000

The higher the basis, capital gains will be lower. But a lower adjusted basis for loss also decreases the amount of capital losses that can be reported if the asset is sold at a lower price.

b. Assume instead that the fair market value of the land was $87,000 and that of the building was $120,000. Determine Gerald’s adjusted basis for the land and building.

Since the fair market value of the gift is higher than the adjusted basis, then Gerald's adjusted basis will be equal to the FMV (for gains or losses):

• Land = $87,000
• Building = $120,000