Grady gives a watch to his nephew, Fred. Grady’s original basis in the watch is $100 and the value of the watch on the date of the gift is $1,000. Fred keeps the watch for a year or two and then sells it for $1,200. What is Fred’s basis in the watch for computing his realized gain or loss?

a. $0. It’s a gift so Fred has no basis.

b. $100. Grady’s basis carries over to Fred.

c. $1,000. Fred takes basis as the market value on the date of the gift.

d. $1,200. Fred’s basis should result in no gain or loss on a gift property.