In January 2011, Clint makes a gift of his beach house (basis of $113,000; fair market value of $413,000) to his aunt. As a result of the transfer, Clint pays a gift tax of $20,000. The aunt dies in December 2011, when the property is worth $420,000. Under the terms of the aunt's will, the property passes to Clint. Clint's income tax basis in the beach house is:

Question

Quizplus · Accepted Answer

Clint's basis in the property would be equal to the aunt's basis at the time of her death, which is known as a "stepped-up" basis. In this case, the aunt's basis would be the fair market value of the property at the time of her death, which is $420,000. However, since Clint previously paid a gift tax on the transfer of the property, he is allowed to increase his basis by the amount of the gift tax paid, which is $20,000. Therefore, his basis in the beach house is $420,000 + $20,000 = $440,000. However, when he originally gifted the property to his aunt, his basis was $113,000, so he would have to reduce his basis by this amount in order to calculate his stepped-up basis, giving a final basis of $440,000 - $113,000 = $327,000. When Clint inherits the property, this becomes his new basis. However, since the question only asks for his income tax basis in the beach house, we do not need to consider any potential estate tax implications for the aunt's estate.

Therefore, the correct answer is B) $128,000.

In January 2011, Clint Makes a Gift of His Beach