Realized Gain or Loss

1. Realized gain or loss is the difference between the amount realized the property’s adjusted basis
2. Money received+ FMV of other property received+ Debt Relief- Selling expense=Amount Realized
3. Cost on date of acquisition +Capital additions -Capital recoveries =Adjusted basis
Capital additions include the cost of improvements. Repair and maintenance expenses are neither capitalized nor
added to the original basis, but they are deductible in the current taxable year.
4. The prominent types of capital recoveries (greater of the depreciation allowed or allowable)
Depreciation and Cost Recovery
Casualties and Thefts
Certain Corporate Distributions
Amortizable Bond Premium
Jane purchased a personal residence in 2010. The purchase price and the related closing costs were:
Purchase price $325,000 Recording costs 140 Title fees and title insurance 815
Survey costs 225 Attorney’s fees 750 Appraisal fee 250
Constructed a swimming pool for medical reasons. The cost was $20,000, of which $5,000 was deducted as a medical
expense.
Added a solar heating system. The cost was $18,000.
Deducted home office expenses of $6,000. Of this amount, $5,200 was for depreciation.
Adjusted basis=325,000+140+815+225+750+250+(20,000-5000) +18,000-5200=354980

Recognized Gain or Loss

1. Recognized gain is the amount of the realized gain that is included in the taxpayer’s gross income. A recognized
loss is the amount of a realized loss that is deductible for tax purposes.
2. Gain realized from the sale of personal use assets is recognized
3. Realized loss on the sale/exchange of personal use assets is not recognized
4. appreciated value is not recognized
a. Kay sells her vacation cabin (adjusted basis of $100,000) for $150,000.
Gain on the sale of a personal use asset is recognized
b. Adam sells his personal residence (adjusted basis of $150,000) for $100,000.
Loss on the sale of personal residence is not recognized.
c. Carl’s personal residence (adjusted basis of $65,000) is condemned by the city. He receives condemnation proceeds
of $55,000.
Condemnation loss on a personal residence is not recognized.
d. Vera’s personal vehicle (adjusted basis of $22,000) is stolen. She receives $23,000 from the insurance company and
does not plan to replace the automobile.
Realized and recognized gain is 1000.

Determination of Cost Basis

1. The basis of property is generally the property’s cost.
2. A bargain purchase results when an employer transfers property to an employee at less than fair market value (as
compensation) or when a corporation transfers property to a shareholder at less than fair market value (a dividend).
The basis of property acquired in a bargain purchase is the property’s fair market value.
3. Cost identification problems are frequently encountered in securities transactions. Unless a taxpayer can
adequately identify the particular stock that has been sold, a security sold is presumed to come from the first lot or lots
purchased (a FIFO presumption).
4. When multiple assets are acquired in a lump-sum purchase, the basis is relative FMV
5. If a business is purchased and goodwill is acquired, use the special residual allocation rule:
the excess of the purchase price over the fair market value of the assets will be allocated to goodwill.
6. Nontaxable stock dividends: If the stock dividend is common, the cost of the original common shares is allocated
to the total shares owned after the dividend.
Susan owns 100 shares of Sparrow Corporation common stock for which she paid $1,100. She receives a 10% common
stock dividend, giving her a new total of 110 shares.
Before the stock dividend, Susan’s basis was $11 per share ($1,100 ÷100 shares). The basis of each share after the stock
dividend is $10 ($1,100 ÷110 shares).
If the nontaxable stock dividend is preferred stock on common, the cost of the original common shares is allocated
between the common and preferred shares based on their relative fair market values.
Fran owns 100 shares of Cardinal Corporation common stock for which she paid $1,000. She receives a nontaxable stock
dividend of 50 shares of preferred stock on her common stock. The fair market values on the date of distribution of the
preferred stock dividend are $30 a share for common stock and $40 a share for preferred stock.
Fair market value of common $3,000
Fair market value of preferred 2,000
Basis of common: 600 (3/5*1000)
Basis of preferred: 400 (2/5*1000)
The basis per share for the common stock is $6 ($600/100 shares). The basis per share for the preferred stock is $8 ($400/50
shares).

Harry purchases a building and land for $800,000. Appraisals of the individual assets indicate that the fair market value of
the building is $600,000 and that of the land is $400,000.
Harry’s basis for the building is $480,000 [($600,000/$1,000,000) ×$800,000], and his basis for the land is $320,000
[($400,000/$1,000,000) ×$800,000].

Kevin purchases 1,000 shares of Bluebird Corporation stock on October 3, 2019, for $300,000. On December 12,
2019, Kevin purchases an additional 750 shares of Bluebird stock for $210,000. According to market quotations,
Bluebird stock is selling for $285 per share on December 31, 2019. Kevin sells 500 shares of Bluebird stock on March
1, 2020, for $162,500.
a. What is the adjusted basis of Kevin’s Bluebird stock on December 31, 2019?
His adjusted basis is 510,000 (300,000+210,000)
b. What is Kevin’s recognized gain or loss from the sale of Bluebird stock on March 1, 2020, assuming that the shares
sold are from the shares purchased on December 12, 2019?
162,500-500*280 (210,000/750) =22,500 The realized and recognized gain is 22,500
c. What is Kevin’s recognized gain or loss from the sale of Bluebird stock on March 1, 2020, assuming that Kevin
cannot adequately identify the shares sold?
If he cannot adequately identify the shares sold, a FIFO presumption is made.
162,500-500*300 (300,000/1000) =12500 The realized and recognized gain is 12500
Rod Clooney purchases Agnes Mitchell’s sole proprietorship for $990,000 on August 15, 2019. The assets of the
business are:

a. Calculate Agnes’s realized and recognized gain.

990,000-620,000=370,000 The realized and recognized gain is 370,000.
b. Determine Rod’s basis for each of the assets.
The purchase price of 990,000 is allocated to assets based on their fair market values. The 205,000 excess of the
purchase price of 990,000 over the FMV of the listed asset of 785,000 is assigned to goodwill. Thus, the basis of each
asset is

Gift Basis
1. a. If the FMV of the asset at the date of gift is greater than the donors adjusted basis, the recipient has a basis
which is the same as the donor's adjusted basis.
b. If the FMV of the asset at the date of gift is less than the donors adjusted basis:
(1) When the disposition of the property results in a loss, the basis to the donee is the FMV
(2) When the disposition of the property results in a gain, the basis to the donee is the donor's adjusted basis.
(3) If the amount realized on disposition sales is between the basis for gain and the basis for loss, no gain or
loss is recognized. Basis equals the amount realized
2. The holding period for property acquired by gift begins on the date the donor acquired the property if the gain
basis rule applies. The holding period starts on the date of the gift if the loss basis rule applies.
3. The basis for depreciation on depreciable gift property is the donor's adjusted basis

a. In 1981, he received land worth $32,000. The donor’s adjusted basis was $35,000. Roberto sells the land for
$95,000 in 2019.
Basis for gain=35,000; 95,000-35,000=60,000 (recognized gain)
b. In 1986, he received stock in Gold Company. The donor’s adjusted basis was $19,000. The fair market value on the
date of the gift was $34,000. Roberto sells the stock for $40,000 in 2019.
Basis for gain= 19,000; 40,000-19,000=21,000 (recognized gain)
c. In 1992, he received land worth $15,000. The donor’s adjusted basis was $20,000. Roberto sells the land for $9,000
in 2019.
Basis for loss=15,000; 9000-15,000=6,000 (recognized loss)
d. In 2013, he received stock worth $30,000. The donor’s adjusted basis was $42,000. Roberto sells the stock for
$38,000 in 2019.
0. The proceeds of 38,000 are between the gain basis of 42,000 and loss basis of 30,000. Therefore, neither gain nor
loss is recognized.
Nicky receives a car from Sam as a gift. Sam paid $48,000 for the car. He had used it for business purposes and had
deducted $10,000 for depreciation up to the time he gave the car to Nicky. The fair market value of the car is $33,000.
a. Assuming that Nicky uses the car for business purposes, what is her basis for depreciation?
The basis for depreciation is the recipient’s gain basis of 38,000 (48,000-10,000). The recipient’s loss basis is the fair
market value at the date of the gift of 33,000
b. Assume that Nicky deducts depreciation of $6,500 and then sells the car for $32,500. What is her recognized gain
or loss?
32,500-(38,000-6500) =1000 Realized and recognized gain is 1000
c. Assume that Nicky deducts depreciation of $6,500 and then sells the car for $20,000. What is her recognized gain
or loss?
20,000- (33,000-6500) =6500 Realized and recognized loss is 6500

Inherited Property
1. The basis in property acquired from a decedent is generally its fair market value at the date of the decedent's death.
2. An estate's executor or administrator may elect the alternate valuation amount, which values the property's at its
FMV six months after the decedent's death only if as a result of the election both the value of the gross estate and the
estate tax liability are less than if no election were made.
3. Income in Respect of a Decedent or “IRD”. If income was earned by a decedent but not reportable by them on
their final individual return under their method of accounting, then the amount will be taxed as income to the
recipient.
4. Both the decedent’s share and the survivor’s share of community property have a basis equal to the fair market
value on the date of the decedent’s death. In a common law state, only one-half of jointly held property of spouses is
included in the estate. In such a case, no adjustment of the basis is permitted for the surviving spouse’s share
5. Holding period for inherited property is deemed to be long-term.

George, age 58, was entitled to a salary payment of $18,000 and a bonus of $20,000 at the time of his death. In addition,
George had been contributing to a traditional IRA for over 20 years. The IRA has a basis of $83,000 and a current value of
$560,000. George’s estate collects the salary and bonus payments, and George’s wife cashes in the IRA.
Both the estate and George’s wife have income in respect of a decedent (IRD) and must include ordinary income in
their computation of taxable income for the year. The estate has IRD of $38,000 (salary of $18,000 +bonus of $20,000), and
George’s wife has IRD of $477,000 ($560,000 proceeds −$83,000 basis).

As sole heir, Dazie receives all of Mary’s property (adjusted basis of $11,400,000 and fair market value of
$13,820,000). Six months after Mary’s death, the fair market value is $13,835,000.
a. Can the executor of Mary’s estate elect the alternate valuation date and amount? Explain.
No. The executor cannot elect the alternate valuation date and amount. To do so, both of the following requirement
must be satisfied.
-The election must result in the reduction of the value of the gross estate
-The election must result in the reduction of the estate tax liability.
b. What is Dazie’s basis for the property?
Dazie’s basis for the property is the fair market value on the date of Mary’s death of 13,820,000
c. Assume instead that the fair market value six months after Mary’s death is $13,800,000. Respond to parts (a) and
(b).
In this case, the FMV at the alternative valuation date is less than it is at the primary valuation date. Assuming that the
election also results in the reduction of the estate tax liability, it can be made. So Dazie’s basis for the property now
becomes 13,800,000.

Helene and Pauline are twin sisters who live in Louisiana and Mississippi, respectively. Helene is married to Frank,
and Pauline is married to Richard. Frank and Richard are killed in an auto accident in 2019 while returning from a
sporting event.
Helene and Frank jointly owned some farmland in Louisiana, a community property state (value of $940,000, cost of
$450,000). Pauline and Richard jointly owned some farmland in Mississippi, a common law state (value of $940,000,
cost of $450,000). Assume that all of Frank’s and Richard’s property passes to their surviving wives.
a. Calculate Helene’s basis in the land.
Helene’s basis for the land is 940,000, the FMV of the land at the date of Frank’s death. Because the Louisiana land is
community property, both the decedent’s share and the survivor’s share have a basis equal to the FMV on the date of
the decedent’s death.
b. Calculate Pauline’s basis in the land.
In this case, Pauline’s basis is stepped up only for Richard’s share of the Mississippi land.
Pauline’s one-half of the jointly held property (carryover basis of 225,000) 225,000
Richard’s one-half of the jointly held property (stepped up from 225,000 to 470,000 due to inclusion in his gross
estate 470,000
Pauline’s new basis: 695,000

Disallowed Losses
1. Related Taxpayers
a. Losses realized from sales or exchanges of property between certain related parties are not recognized.
2. Wash Sales
a. A realized loss is not recognized when the taxpayer disposes of stock and, within 30 days before or after
such disposition, acquires substantially identical stock or securities.
b. The loss not recognized is added to the basis of the substantially identical stock or securities acquired.
The holding period of the new stock or securities includes the holding period of the old.

Sheila sells land to Elane, her sister, for the fair market value of $40,000. Six months later when the land is worth
$45,000, Elane gives it to Jacob, her son. (No gift tax resulted.) Shortly thereafter, Jacob sells the land for $48,000.
a. Assuming that Sheila’s adjusted basis for the land is $24,000, what are Sheila’s and Jacob’s recognized gain or loss
on the sales?
Sheila: 40,000-24,000=16,000 Realized and recognized gain is 16,000
Jacob: 48,000-40,000=8,000 Realized and recognized gain is 8000
b. Assuming that Sheila’s adjusted basis for the land is $60,000, what are Sheila’s and Jacob’s recognized gain or loss
on the sales?
Shelia: 40,000-60,000=20,000 Realized loss is 20,000; recognized loss is 0
Jacob: 48,000-40,000=8000 Realized and recognized gain is 8000.
Jacob is not eligible to use any Sheila’s disallowed loss of 20,000 under the right of offset, because he is not original
transferee (Elane is the original transferee)
On December 28, 2019, Kramer sells 150 shares of Lavender, Inc. stock for $77,000. On January 10, 2020, he
purchases 100 shares of the same stock for $82,000.
a. Assuming that Kramer’s adjusted basis for the stock sold is $65,000, what is his recognized gain or loss? What is
his basis for the new shares?
Realized and recognized gain is 77,000-65,000=12,000.
Her adjusted basis for the 100 shares purchased on January 10, 2020 is the cost of 82,000
b. Assuming that Kramer’s adjusted basis for the stock sold is $89,000, what is his recognized gain or loss? What is
his basis for the new shares?
Realized loss is 77,000-89,000=12,000 Recognized loss is 4000
2/3 of the stock sold is subject to the wash sale rules because he purchased 100 shares within 30 days of the sale date.
Therefore, 2/3 of the realized loss of 12,000 is disallowed and 1/3 is recognized.
Her basis for the stock is cost+ disallowed loss=82,000+8000=90,000

Conversion of Personal Use Property to Business or Income-Producing Property

1. The basis for loss on personal use assets converted to business or income producing use is the lower of the
property's adjusted basis or fair market value on the date of conversion.
2. The gain basis for converted property is equal to its adjusted basis on the date of conversion.
3. The basis for loss serves as the basis for depreciating the converted property.
Surendra’s personal residence originally cost $340,000 (ignore land). After living in the house for five years, he
converts it to rental property. At the date of conversion, the fair market value of the house is $320,000. As to the rental
property, calculate Surendra’s basis for:
a. Loss.
The basis for loss is 320,000, the lower of the adjusted basis of 340,000 or the FMV at the date of conversion of
320,000
b. Depreciation.
Her basis for depreciation is 320,000, the same as the basis for loss
c. Gain.
Her basis for gain is the adjusted basis of 340,000
d. Could Surendra have obtained better tax results if he had sold his personal residence for $320,000 and then
purchased another house for $320,000 to hold as rental property? Explain.
No. Her residence is a personal use asset. If she sold her residence for 320,000, she would realize a loss of 20,000 on
the sale. Since this a personal use asset, this realized loss is not recognized.