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NEW QUESTION: 1
Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market
value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of
Thompson's gain on the disposition?
A. $1,300
B. $2,500
C. $0
D. $1,100
Answer: A
Explanation:
Explanation
Choice "c" is correct. The general rule for the basis on gifted property is that the donee receives the
property with a rollover cost basis (equal to the donor's basis). An exception exists where the fair market
value of the property at the time of the gift is less than the donor's basis. That is not the case in this
question; thus, the calculation of the gain on the disposition of the property is:

Choice "a" is incorrect. This choice could be correct if the facts of the question met the exception whereby
no gain or loss is recognized when a donee sells gifted property for an amount between the donor's basis
and the fair market value at the date of the gift.
Choice "b" is incorrect. This choice uses the basis as the fair market value of the property. Fair market
value of property at date of death is used as the basis for inherited property, not gifted property.
Choice "d" is incorrect. This choice assumes that Thompson's basis is zero. His basis is $1,200 as
indicated above.