Question 1

A taxpayer sells property to their adult child for $40,000. The taxpayer's basis was $60,000. Two years later, the child sells the property to an unrelated party for $70,000. What is the child's recognized gain on the second sale?

Accepted Answer

1. Parent sells to Related Party -> Loss Disallowed ($20k). 2. Child sells to Outsider -> Calculate Gain ($30k). 3. Child reduces Gain by Parent's Disallowed Loss ($30k - $20k = $10k). Note: Can only reduce gain to zero, cannot create a loss.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting that the disallowed loss stays with the property/transferee to offset future gain.

A taxpayer sells property to their adult child for $40,000. The taxpayer's basis was $60,000. Two years later, the child sells the property to an unrelated party for $70,000. What is the child's recognized gain on the second sale?

How to approach this question

Full Answer

Common mistakes

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