Monica sells a parcel of land to her son, Elbert, for $90,000. Monica’s adjusted

Question

Monica sells a parcel of land to her son, Elbert, for $90,000. Monica’s adjusted basis is $100,000. Three years later, Elbert gives the land to his fiancée, Karen. At that date, the land is worth $104,000. No gift tax is paid. Since Elbert is going to be stationed in the U.S. Army in Germany for 3 years, they do not plan on being married until his tour is completed. Six months after receiving the land, Karen sells it for $110,000. At the same time, Karen sends Elbert a “Dear John” email. Calculate Karen’s realized and recognized gain or loss.

Explanation / Answer

Elbert’s adjusted basis for the land is his purchase price of $90,000. When Elbert gives the land to Karen, heradjusted basis is a carryover basis of $90,000. Karen’s gain on the sale is calculated as follows:Amount realized$110,000Adjusted basis(90,000)Realized gain$20,000Recognized gain$20,000Monica’s disallowed loss of $10,000 ($90,000 amount realized – $100,000 adjusted basis) could have been used as an offset by Elbert if he had sold the land at a realized gain.But, it cannot be used by Karen since she is not the original transfree(i.e, related- party buyer)

the land at a realized gain. But, it cannot be used by Karen since she is not the original transferee (i.e., related-party buyer).

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