[June.K]

Hi Guys, I have a very strange solution regarding to this question.

Before the question, what I know is that the value of a gift is the FMV of the property on the date the gift is made. Now, here is the question.

Q.
Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair value of $32,000. Ignoring gift tax consequences, what is Russett’s basis in the euquipment?

a. 31,000
b. 32,000
c. 35,000
d. 36,000

Solution. Answer is (a) 31,000 If the FMV exceeds the basis at the time of the gift, the donee’s basis in the property is the donor’s basis.

what the heck. Can someone please explain what this is?
Much appreciated in advance.

[mricci1989]

With a gift you gain donors basis + gift tax for Gain. For loss you take lessor of donors basis or FMV. In this case Donors basis is below FMV so you would use donor basis for both a gain or a loss so the basis is $31,000.

Note: not an expert on this. This is just how I understand it from my notes. Please correct me 71-ers if I am wrong!

FAR - 79 4/16
AUD - 80 7/16
REG - TBD 8/16
BEC - TBD 10/16

[June.K]

@ mricci1989 Thanks for your input. I was digging into more similar questions and like to share what what I have noticed.

“If the fair market value exceeds the basis at the time of the gift, the donee's basis in the property is the donor's basis”

[A1lessio]

Tim Gearty really broke it down for me. With gifts think of grandma rolling forward gifts to you as in roll-forward basis. Inheritance – think of someone stepping out of the grave- step-up basis or FMV at date of death.

For gifts received use the donor basis if FMV is greater than Adjusted Basis. So Russet's basis is Bluff's basis which is $31,000 ($35,000 + $1,000 -$5,000 depreciation). Notice that the the FMV of $32,000 is greater than Donor Basis of $31,000 so this rule applies.

If FMV is less than Adjusted basis you use the dual basis rule. Russet's basis would depend on if Russet sells it for a gain or loss. When you sell for a gain use adjusted basis and a loss use FMV. In between no gain/loss recognized. Example: Basis 10,000, FMV 9,000 and Sale price is 11,000. His basis is 10,000.

The dual basis rule is tricky at first, but gets really easy. Just remember to always look at FMV and Basis when you read the question and then decide from there.

AUD (08/02/2016)

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