ExpertMedium1 markMultiple Choice
CPA · Question 30 · Area IV: Property Transactions
A taxpayer sells property to their adult child for $40,000. The property had an adjusted basis of $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 property had an adjusted basis of $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.
$10,000 Loss
How to approach this question
1. Parent's loss ($20k) is disallowed under §267. 2. Child's basis is cost ($40k). 3. Child's gain ($30k) is reduced by Parent's disallowed loss ($20k).
Full Answer
B.$10,000✓ Correct
IRC §267(d). The parent's $20,000 loss is disallowed. When the child sells, they realize a $30,000 gain ($70k - $40k). They can reduce this gain by the previously disallowed loss ($20,000). Recognized gain = $10,000.
Common mistakes
Adding the disallowed loss to the child's basis immediately (incorrect); forgetting to use the loss to offset gain.
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