Series 7 practice questionhardTax Implications — Gift and Estate Tax
A grandmother bought stock at $20 per share. She gifts it to her grandson when the fair market value is $15. The grandson later sells it at $17. What is the tax consequence?
- AA $3 per share loss
- BA $2 per share gain
- CNo gain or no loss recognized✓ Correct answer
- DA $3 per share gain
Explanation
Why C — No gain or no loss recognized
When gifted property has a FMV less than the donor's basis at the time of gift, dual basis rules apply. For gains, the donor's basis ($20) is used — since $17 < $20, there is no gain. For losses, the FMV at time of gift ($15) is used — since $17 > $15, there is no loss. When the sale price falls between the two bases, the result is no gain and no loss. This is sometimes called the "no man's land" or "indeterminate" zone.
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