ExpertMedium1 markMultiple Choice
CPA · Question 26 · Area IV: Property Transactions
A taxpayer sells property to their adult child for $40,000. The taxpayer's basis was $60,000. Two years later, the child sells the property to an unrelated party for $70,000. What is the child's recognized gain on the second sale?
A taxpayer sells property to their adult child for $40,000. The taxpayer's basis was $60,000. Two years later, the child sells the property to an unrelated party for $70,000. What is the child's recognized gain on the second sale?
Answer options:
A.
$30,000
B.
$10,000
C.
$0
D.
$20,000
How to approach this question
1. Parent sells to Related Party -> Loss Disallowed ($20k). 2. Child sells to Outsider -> Calculate Gain ($30k). 3. Child reduces Gain by Parent's Disallowed Loss ($30k - $20k = $10k). Note: Can only reduce gain to zero, cannot create a loss.
Full Answer
B.$10,000✓ Correct
$10,000
Under IRC §267(a)(1), the parent's $20,000 loss is disallowed. Under IRC §267(d), the child can reduce their recognized gain ($30,000) by the amount of the previously disallowed loss ($20,000). $30,000 - $20,000 = $10,000 recognized gain.
Common mistakes
Forgetting that the disallowed loss stays with the property/transferee to offset future gain.
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