Basis - Answer Key
1. C 4.
Because of the "Double Basis Rule" (where FMV is less than the adjusted basis on the date of the gift), Laura will not have any taxable gains or losses on the sale of the collection if she receives between $15,000 and $20,000 for the sale.
New Basis = Original Cost + [(Appreciation / FMV) x Gift tax]
$27,500 = $20,000 + [($60,000 / $80,000) x $10,000]
3. B Under the "Death Bed Gifting Rule," gifted property received back in one year, or less, by the donor does not receive a "step up" to FMV. Instead, the basis reverts back to the original donor's adjusted basis.
Because Pete and Pat owned the account as "community property," Pat receives a full "step up" to FMV on both halves of the account at the death of the first spouse.
All of the actions listed above (except legal fees incurred), will be considered capital improvements and increase his original basis. Legal fees incurred for defending or perfecting titles are considered additional items to basis.