In January 2013 and when the annual exclusion was $14,000, Clint makes a gift of his beach house (basis of $114,000; fair market value of $414,000) to his aunt. As a result of the transfer, Clint pays a gift tax of $20,000. The aunt dies in December 2013, 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

When Clint made the gift of the beach house to his aunt, he incurred a gift tax of $20,000. To determine his income tax basis in the property, we need to use the following formula:

Adjusted Basis = Original Basis + (Gift Tax Paid ÷ (Fair Market Value at time of gift ÷ Fair Market Value at time of gift + Gift Tax Paid))

Adjusted Basis = $114,000 + ($20,000 ÷ ($414,000 ÷ $414,000 + $20,000))

Adjusted Basis = $129,000

Therefore, Clint's income tax basis in the beach house is $129,000.

In January 2013 and When the Annual Exclusion Was $14,000