In 2014, Emilio, who is 82 years old, transfers property with an adjusted cost base of $400,000 and a fair market value of $750,000 to an inter vivos family trust to benefit his 3 adult children. In 2015, he becomes seriously disappointed with his two sons, and decides to transfer the property to his daughter and wind up the trust. At this time the fair market value of the property has increased to $800,000. For both transactions, Emilio uses any rollovers that are available to minimize the tax consequences. What are the tax consequences of these two transfers?
a. In 2014, a rollover would allow Emilio to transfer his property to the trust tax free. In 2015, when the trust transfers the property to his daughter, the trust will include a taxable capital gain of $200,000 [(1/2)($800,000 - $400,000)] in income.
b. In 2014, there will be no rollover available, and Emilio will include a taxable capital gain of $175,000 [(1/2)($750,000 - $400,000)] in income. In 2015, when the trust transfers the property to his daughter, there will be a rollover available, and the trust will not report any income.
c. There will not be a rollover available for either transaction. In 2014, Emilio will report a taxable capital gain of $175,000 [(1/2)($750,000 - $400,000)] in income. In 2015, when the property is transferred to his daughter, the trust will include a taxable capital gain in income of $25,000 [(1/2)($800,000 - $750,000)].
d. Rollovers will be available to defer tax on both transactions.