Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct? Group of answer choices Nikeya’s recognized loss is $25,000 ($95,000 amount realized – $120,000 adjusted basis). Shamed’s adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya). If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss. Only a. and b. are correct.

In this scenario, Nikeya is selling land to her son, Shamed, for less than her adjusted basis, resulting in a loss. However, when it comes to transactions between related parties, such as family members, the IRS has specific rules. 1. **Nikeya’s recognized loss is $25,000 ($95,000 amount realized – $120,000 adjusted basis).** This statement is incorrect. While the calculation shows a $25,000 loss, the IRS does not allow the recognition of losses on sales or exchanges of property between related parties, which includes family members like a parent and child. Therefore, Nikeya cannot recognize this loss for tax purposes. 2. **Shamed’s adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).** This statement is incorrect. Shamed's basis in the land is the purchase price he paid, which is $95,000. The disallowed loss from Nikeya does not increase Shamed's basis. 3. **If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.** This statement is incorrect. If Shamed sells the land for $112,000, his gain would be calculated as the selling price ($112,000) minus his basis ($95,000), resulting in a $17,000 gain. Therefore, none of the statements provided are correct.

Get Started

Get your tax questions answered