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Scenario: Jamie is terminally ill and does not expect to live much longer. Pondering the consequences of her

estate, she decides how to allocate her property to her nephews. She makes a gift of depreciated property (i.e., adjusted basis exceeds fair market value) to Will, a gift of appreciated property (i.e., fair market value exceeds adjusted basis) to Jim, and leaves appreciated property to Sam in her will. Each of the properties has the same fair market value. From an income tax perspective, which nephew is her favorite? Explain your answer.


I need help with a formulating response to the answer below:


"Whenever property is disposed of by sale, gift, trade or inheritance, a potential tax consequence exists. The gain or loss from the disposition of the property is determined by comparing the sale price to the adjusted basis in the property. Determining basis of property that is received as a gift can be complicated. To figure the basis of property received as a gift the recipient must know its basis to the donor just before it was given to the recipient — its fair market value (FMV) at the time it was given and the amount of gift tax paid on it, if any. If the FMV of the property when received is more than the donor's basis then the recipient's basis in the gift is the donor's basis plus all (for gifts received prior to 1977) or part (for gifts received after 1976) of any gift tax paid on it. The only limitation is that the recipient's basis cannot be above the FMV of the gift on the date it was given. If the FMV of the property when it is received is less than the donor's basis, then the recipient's basis in the gift is usually the donor's basis. However, if a loss is incurred when the recipient disposes of the gifted property, the basis is not the donor's basis but is the FMV at the time the gift was given.

To figure out the basis of property you receive as a gift, you must know three amounts: The adjusted cost basis to the donor just before the donor made the gift to you. The fair market value (FMV) at the time the donor made the gift. The amount of any gift tax paid on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. From an income tax perspective Jamie's favorite nephew would be Jim and Sam. Jim and Sam both received a piece of appreciated property. Under our tax laws basis remains the same until time of sale. They both received an appreciated asset. Will on the other hand is going to have to do a little addition and subtraction and figure out what his loss is."

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I regards to above response, I do agree that the taxpayers who appear to gain a more favorable gifting are the ones that... View the full answer

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