For each of the following capital asset dispositions, determine whether the taxpayer has realized a gain or loss and whether that gain or loss is short-term or long-term:
- Larry’s aunt June dies on May 4, 2007. He inherits some land that she purchased in 1988 for $2,000. On May 4, 2007, the land is worth $40,000. Larry receives title to the land on October 15, 2007, and sells it on November 27, 2007, for $40,000. He pays $3,000 in commissions and other selling expenses.
- Sterling receives 4,000 shares of Suburb Corporation stock as a birthday present from his mother-in-law on May 6, 2007. His mother-in-law had paid $18,000 for the stock 8 years earlier. On May 6, 2007, the stock has a fair market value of $4,000. On June 18, 2007, Sterling sells 1,000 shares of the stock for $800
Larry has a long-term capital loss of $3,000. Larry’s basis in the land is the fair market value on the date of death, $40,000. Even though Larry held the land for less than two months, inherited property is always deemed to be held long-term.
Amount realized ($40,000 – $3,000) $ 37,000
Adjusted basis (40,000)
Long-term capital loss $ (3,000)
2
Because the shares of stock have declined in value, the split basis rule for gifts applies. Sterling’s basis for gain is $4.50 per share ($18,000 ÷ 4,000) and his basis for loss is $1 per share ($4,000 ÷ 4,000). Sterling sold the 1,000 shares for $800, resulting in a loss of $200 [$800 – (1,000 x $1)]. Because Sterling uses the fair market value on the date of the gift as his basis, the sale of the 1,000 shares is a short-term capital loss since the stock was held < 12 months (May 6 to June 18).
