Question

1. Larry purchased a property for $20,000 in 2015. In 2017, Larry gave that property to his sister when its FMV was $50,000. No gift taxes were paid. Larry’s sister died at the end of 2017 and bequeaths the property back to Larry when its FMV was $52,000. In 2018, Larry sold the property for $55,000. How much gain on the sale must he recognized?

Answer 1

Larry should recognize a gain of 3,000$ (55,000 $ (S.P) - 52,000$ (Cost basis) ) on the sale of the property.

Determining the cost basis of the gifted property :

Background of the law : Capital gains tax basis for gifted property while the person gifting the property is alive is treated as the original cost of the purchase of property to the original owner of the asset. However, if the property is inherited after death of the donor, that changes everything. If the property was inherited instead of being gifted, its cost basis would be "stepped up" to the date of the donor's death.

In the current case. following implications apply :

1. When Larry transferred property to his sister in 2017, cost basis for his sister was 20,000 $ which is the original cost of purchase to Larry.

2. However Larry's sister did not gift the property back to Larry, instead, it was bequeathed back to Larry on account of his sister's death and hence the cost basis would be stepped up to the date of his sister's death, i.e., it would be taken as the FMV as on that date which was 52,000 $.

Hence gain on sale of property = 55,000-52,000 = 3,000$.