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Federal Taxation: gifts, inheritance, holding period

1. Abner, age 80 and in poor health, owns investment land with an adjusted basis of $50,000. He is considering transferring it to Stella, his niece. Regarding Stella's income tax position, should the transfer to her be by gift or by inheritance? (Assume neither gift tax nor estate tax would be due, and that the property is not expected to change in value.)
a. If the fair market value of the land is $200,000, the transfer should be by inheritance.
b. If the fair market value of the land is $10,000, the transfer should be by gift.
c. If the fair market value of the land is $50,000, the transfer can be either by gift or by inheritance (i.e., the tax consequences are the same).
d. Only a. and c. are correct.
e. a., b., and c. are correct.

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2. Tobin inherited 100 acres of land on the death of his father in 2007. A Federal estate tax return was filed and the land was valued at $300,000 (its fair market value at the date of the death). The father had originally acquired the land in 1964 for $19,000 and prior to his death had made permanent improvements of $6,000.
What is Tobin's basis in the land?
a. $19,000.
b. $25,000.
c. $300,000.
d. $325,000.
e. None of the above.

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3. Taylor inherited 100 acres of land on the death of his father in 2007. A Federal estate tax return was filed and this land was valued therein at $15,000, its fair market value at the date of the father's death. The father had originally acquired the land in 1940 for $2,000 and prior to his death he had expended $1,000 on permanent improvements. Determine Taylor's holding period for the land.
a. Will begin with the date his father acquired the property.
b. Will automatically be long-term.
c. Will begin with the date of his father's death.
d. Will begin with the date the property is distributed to him.
e. None of the above.

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4. Lynn purchases a house for $52,000. She converts the property to rental property when the fair market value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for $120,000.
What is her recognized gain or loss?
a. $0.
b. $6,130.
c. $37,630.
d. $69,130.
e. None of the above.

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5. Brett owns investment land located in Tucson, Arizona. He exchanges it for other investment land. In which of the following locations may the other investment land be located and enable Brett to qualify for ยง 1031
like-kind exchange treatment?
a. Mexico City, Mexico.
b. Toronto, Canada.
c. Paris, France.
d. Only a. and b.
e. None of the above.

Solution Preview

1. Abner should allow Alice to inherit the property because she will get a step-up in value through the inheritance process. If Abner gifts it to her, she takes the basis of the donor of $50,000. A and C are true. B is not a good solution because the value of a gift is determined at the time of transfer as the lower of value or cost.

2. The basis is ...

Solution Summary

The 266-word solution presents good discussion to explain the concepts leading to the answers about basis and value of property gifted or inherited.

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