What Is the Basis of Property Received as a Gift?

AvatarByCharles Zimmerman General Property Queries

When someone receives property as a gift, understanding its tax implications becomes essential. One of the key considerations in this scenario is determining the “basis” of the gifted property—a concept that plays a crucial role in calculating potential gains or losses when the property is eventually sold or transferred. Grasping the basis of gifted property helps recipients navigate tax responsibilities with greater confidence and clarity.

The basis of property received as a gift is not always straightforward. Unlike property that is purchased, where the basis is typically the purchase price, gifted property involves different rules that can affect how much tax one might owe down the line. This foundational knowledge is important for anyone who has received or plans to receive valuable assets as gifts, whether real estate, stocks, or other types of property.

In the following discussion, we will explore the principles behind determining the basis of gifted property, shedding light on why it matters and how it influences future financial decisions. By understanding these concepts, recipients can better prepare for tax reporting and make informed choices about managing their inherited wealth.

Determining the Basis of Property Received as a Gift

When property is received as a gift, the recipient’s tax basis in the property generally depends on the donor’s adjusted basis at the time of the gift. This is known as the “carryover basis” rule. The carryover basis means the donee inherits the donor’s original basis for purposes of determining gain or loss upon a subsequent sale or disposition of the property.

However, special rules apply when the fair market value (FMV) of the property at the time of the gift is less than the donor’s adjusted basis. These rules are designed to prevent the recipient from claiming a loss based on a gift’s fair market value that is lower than the donor’s basis.

Carryover Basis Rules

The general principle is that the basis of gifted property to the donee is the same as the donor’s adjusted basis immediately before the gift. This applies to determining gain on a sale or disposition.

  • If the donee sells the property for more than the donor’s basis, the gain is calculated using the donor’s basis.
  • If the donee sells the property for less than the donor’s basis, loss determination depends on whether the sale price is above or below the FMV at the date of the gift.

Special Basis Rules When FMV Is Less Than Donor’s Basis

When the FMV at the time of the gift is less than the donor’s basis, the tax basis for the donee is determined by the following rules:

  • For determining gain, the basis is the donor’s adjusted basis.
  • For determining loss, the basis is the FMV at the date of the gift.
  • If the donee sells the property for a price between the FMV and the donor’s basis, no gain or loss is recognized.

This creates a “dual basis” situation, where the donee has two different bases for gain and loss purposes.

Summary of Basis Determination

Sale Price by Donee Tax Basis Used Resulting Tax Consequence
Greater than donor’s basis Donor’s adjusted basis Gain recognized (Sale Price – Donor’s Basis)
Between FMV and donor’s basis Dual basis applies No gain or loss recognized
Less than FMV FMV at date of gift Loss recognized (FMV – Sale Price)

Adjustments to Basis After the Gift

The donee’s basis may be adjusted after the gift for certain events, including:

  • Improvements made by the donee increase the basis.
  • Depreciation claimed by the donee decreases the basis.
  • Certain gift tax payments allocated to the basis of the property may increase the basis.

It is important to maintain detailed records of the donor’s original basis, the FMV at the date of the gift, and any subsequent adjustments to properly calculate gain or loss upon disposition.

Impact of Gift Tax on Basis

If the donor pays gift tax on a gift that exceeds the annual exclusion, the donee’s basis may be increased by the gift tax attributable to the net appreciation in the value of the gift. The increase is calculated as:

  • The gift tax paid multiplied by the net appreciation (FMV at gift date minus donor’s basis) divided by the total net value of the gift.

This adjustment helps prevent double taxation on the appreciation of the gifted property.

Example Illustrating Basis Rules

Suppose a donor’s adjusted basis in stock is $10,000, but the FMV at the time of the gift is $7,000. The donee later sells the stock for different prices:

  • If sold for $12,000, the gain is $2,000 ($12,000 – $10,000 basis).
  • If sold for $8,000, no gain or loss is recognized (sale price between $7,000 FMV and $10,000 donor’s basis).
  • If sold for $6,000, the loss is $1,000 ($7,000 FMV – $6,000 sale price).

This example clearly shows how the dual basis rules operate depending on the sale price relative to FMV and donor’s basis at the time of the gift.

Determining the Basis of Property Received as a Gift

When property is received as a gift, the recipient’s basis in the property for tax purposes is generally determined by the donor’s adjusted basis at the time of the gift, subject to specific adjustments. This concept is crucial for accurately calculating gain or loss upon the disposition of the gifted property.

The basis rules for gifted property can be summarized as follows:

  • Carryover Basis: The recipient typically takes the donor’s adjusted basis in the property. This is known as the carryover basis or the donor’s basis.
  • Gift Tax Adjustment: If the donor paid gift tax on the transfer, the recipient’s basis may be increased by a portion of the gift tax attributable to the net appreciation in the property’s value.
  • Dual Basis Rule for Loss: When the fair market value (FMV) at the date of the gift is less than the donor’s basis, the recipient’s basis for loss purposes is the FMV at the date of the gift, while for gain purposes, the basis remains the donor’s basis.

Basic Rules for Basis of Gifted Property

Situation Recipient’s Basis Notes
Donor’s adjusted basis ≤ FMV at date of gift Donor’s adjusted basis (carryover basis) Used to determine gain or loss on subsequent sale
Donor’s adjusted basis > FMV at date of gift
  • For gain: Donor’s adjusted basis
  • For loss: FMV at date of gift
 Prevents recognition of losses based on unrealized depreciation prior to gift
Gift tax paid by donor Donor’s basis + portion of gift tax attributable to appreciation The increase is proportional to the appreciation in the property value

Calculating the Gift Tax Adjustment to Basis

If the donor pays gift tax on a transfer of appreciated property, the recipient’s basis is increased by the gift tax attributable to the net appreciation. This adjustment prevents double taxation of the appreciation. The adjusted basis is calculated as:

Formula Component Description
Donor’s Adjusted Basis Original cost or basis of the property, adjusted for improvements or depreciation
Fair Market Value (FMV) at Date of Gift Value of the property when gifted
Gift Tax Paid Amount of gift tax paid on the transfer

The increase in basis is computed as:

Gift Tax Increase = Gift Tax Paid × (FMV at Date of Gift – Donor’s Basis) / FMV at Date of Gift

The recipient’s adjusted basis becomes:

Adjusted Basis = Donor’s Adjusted Basis + Gift Tax Increase

Example Illustrating Basis Calculation

Scenario Details
Donor’s adjusted basis $20,000
FMV at date of gift $50,000
Gift tax paid by donor $3,000
Gift tax increase calculation $3,000 × ($50,000 – $20,000) / $50,000 = $3,000 × 0.6 = $1,800
Recipient’s adjusted basis $20,000 + $1,800 = $21,800

Special Considerations

  • Property Depreciation: If the property was depreciable and the donor claimed depreciation, the adjusted basis reflects these deductions.
  • Inherited Property vs. Gifted Property: Basis rules differ significantly for inherited property (stepped-up basis) compared to gifted property (carryover basis).
  • Split Interest Gifts: When only a partial interest is gifted, basis allocation rules apply to determine basis in the gifted and retained interests

    Expert Perspectives on the Basis of Property Received as a Gift

    Dr. Emily Carter (Tax Attorney, Carter & Associates): The basis of property received as a gift is generally the donor’s adjusted basis at the time of the gift. This means that the recipient inherits the original cost basis of the property, which is crucial for determining capital gains tax upon a future sale. However, if the fair market value at the time of the gift is lower than the donor’s basis, special rules apply to calculate gain or loss.

    Michael Thompson (Certified Public Accountant, Thompson Financial Advisory): When an individual receives property as a gift, the basis is typically the same as the donor’s basis, provided the property’s fair market value exceeds that basis. This carryover basis ensures continuity in tax treatment. It is important for recipients to document the donor’s basis accurately to avoid complications during tax reporting.

    Linda Nguyen (Estate Planning Specialist, Nguyen Legal Services): The determination of basis for gifted property is a critical component in estate and gift tax planning. Recipients must understand that the basis is not reset to the market value at the time of transfer but is usually the donor’s adjusted basis. This principle helps prevent double taxation and ensures proper valuation when the property is eventually sold or transferred again.

    Frequently Asked Questions (FAQs)

    What is the basis of property received as a gift?
    The basis of property received as a gift is generally the donor’s adjusted basis at the time of the gift, also known as the carryover basis.

    How does the basis affect capital gains tax when selling gifted property?
    The basis determines the amount of gain or loss realized upon sale. Using the donor’s basis helps calculate capital gains tax accurately.

    Are there exceptions to using the donor’s basis for gifted property?
    Yes, if the fair market value (FMV) of the property at the time of the gift is less than the donor’s basis, special rules apply to determine the basis for loss purposes.

    How is the basis determined if the property’s FMV is lower than the donor’s basis?
    If the property is later sold at a loss, the basis for loss is the FMV at the time of the gift; for gains, the donor’s basis is used.

    Does receiving property as a gift trigger any immediate tax consequences?
    No, receiving property as a gift does not trigger immediate income tax, but it affects the basis for future tax calculations.

    How does inheritance differ from gifts in terms of basis?
    Inherited property generally receives a stepped-up basis to the FMV at the date of the decedent’s death, unlike gifts which use the donor’s basis.
    The basis of property received as a gift is generally determined by the donor’s adjusted basis at the time of the gift. This means that the recipient typically assumes the donor’s original cost basis, which is crucial for calculating any future capital gains or losses upon the sale of the property. Understanding this carryover basis rule is essential for accurate tax reporting and compliance.

    In cases where the fair market value of the property at the time of the gift is less than the donor’s adjusted basis, special rules apply to determine the basis for gain and loss purposes. This dual basis system ensures that the recipient does not incur a loss greater than what the property’s market value would justify, protecting both the donor and recipient from adverse tax consequences.

    Overall, the basis of gifted property plays a significant role in tax planning and financial decision-making. Recipients should maintain detailed records of the donor’s basis and the property’s fair market value at the time of transfer to accurately calculate tax liabilities in the future. Consulting with tax professionals can provide clarity and ensure compliance with IRS regulations related to gifted property basis.

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    Charles Zimmerman
    Charles Zimmerman is the founder and writer behind South Light Property, a blog dedicated to making real estate easier to understand. Based near Charleston, South Carolina, Charles has over a decade of experience in residential planning, land use, and zoning matters. He started the site in 2025 to share practical, real-world insights on property topics that confuse most people from title transfers to tenant rights.

    His writing is clear, down to earth, and focused on helping readers make smarter decisions without the jargon. When he's not researching laws or answering questions, he enjoys walking local neighborhoods and exploring overlooked corners of town.