MODULE 34 TAXES: TRANSACTIONS IN PROPERTY 491

TRANSACTIONS IN PROPERTY

A. Sales and Other Dispositions

A sale or other disposition is a transaction that generally gives rise to the recognition of gain or loss.
Gains or losses may be categorized as ordinary or capital. If an exchange is nontaxable, the recognition of
gain or loss is generally deferred until a later sale of the newlyacquired property. This is accomplished by
giving the property received the basis of the old property exchanged.
1. The basis of property to determine gain or loss is generally its cost or purchase price.
a. The cost of property is the amount paid for it in cash or the FMV of other property, plus expenses
connected with the purchase such as abstract of title fees, installation of utility services, legal fees
(including title search, contract, and deed fees), recording fees, surveys, transfer taxes, owner's ti-
tle insurance, and any amounts the seller owes that the buyer agrees to pay (e.g., back taxes and
interest, recording or mortgage fees, charges for improvements or repairs, sales commissions).

b. If property is acquired subject to a debt, or the purchaser assumes a debt, this debt is also included
in cost.
EXAMPLE: Susan purchased a parcel of land by paying cash of $30,000 and assuming a mortgage of $60,000.
She also paid $400 for a title insurance policy on the land. Susan's basis for the land is $90,400.

c. If acquired by gift, the basis for gain is the basis of the donor (transferred basis) increased by any
gift tax paid attributable to the net appreciation in the value of the gift.

(1) Basis for loss is lesser of gain basis (above), or FMV on date of gift.
(2) Because of this rule, no gain or loss is recognized when use of the basis for computing loss
results in a gain, and use of the basis for computing gain results in a loss.
EXAMPLE: Jill received a boat from her father as a gift. Father's adjusted basis was $10,000 and FMV
was $8,000 at date of gift. Jilt's basis for gain is $10,000, while her basis for loss is $8,000. 'If Jilllater sells
the boat for $9,200, no gain or loss will be recognized.

(3) The increase in basis for gift tax paid is limited to the amount (not to exceed the gift tax paid)
that bears the same ratio to the amount of gift tax paid as the net appreciation in value
of the
gift bears to the amount of 'the gift.

(a) The amount of gift is reduced by any portion of the $13,000 annual exclusion ($12,000
for 2008) allowable with respect to the gift. '
(b) Where more than one gift of a present' interest is ma-de to the same donee during a calen-
dar year, the $13,000 exclusion is applied to gifts in chronological order.
EXAMPLE: Tom received a gift of property with a FMV of $103,000 and an adjusted basi~ of $73,000.
The donor paid a gift tax of $18, 000 on the transfer. Tom's basis for the property would be $79,000

determined as follows: .

$ 73, 000 basis + [ $]8, 000 gift tax x ($ 103, 000 FMV - $ 73, 000 basis)'] = $ 79, 000
($]03, 000 FMV - $13, 000 exclusion)

d. If acquired from decedent, basis is property's FMV on date of decedent's death, or alternate
valuation date (generally six months after death).

(1) Use FMV on date of disposition if alternate valuation is elected and property is distributed,
sold, or otherwise disposed of during six-month period following death.
EXAMPLE: Ann received JOO shares of stock as an inheritance from her uncle Henry, who died January 20,
2009. The stock had a FMV of $40,000 on January20, and a FMV of $30,000 on July 20, 2009 .. The stock's
FMV was $34,000 on June 15, 2009, the date the stock was distributed to Ann.

If the alternate valuation is not elected, or no estate tax return. is filed, Ann's basis for the stock is its
FMV of $40,000 on the date of Henry's death. If the alternate valuation is elected, Ann's basis wilt be the
stock's $34,000 FMV on June 15 (the date of distribution) since the stock was distributed to Ann within six
months after-the decedent's death.
(2) FMV rule not applicable to appreciated property acquired by the decedent by gift within one
year before death if such property then passes from the donee-decedent to the original donor
or donor's spouse. The basis of such property to the original donor (orspouse) will be the
adjusted basis of the property to the decedent immediately before death.