You’ve received a gift of property. It’s important to learn about the tax consequences if you decide to sell that property.
In the event of a sale, you’ll have to determine your gain or loss, and for this you’ll need to know your basis.
In most situations, the basis of an asset is its cost to you. For property received as a gift, however, special basis rules apply.Internal Revenue Service
Carryover Basis for Gift Property
The general rule is that you receive the same basis in the property that the donor had in it. This is sometimes called a carryover basis, because the donor’s basis carries over to you as the donee.
Many taxpayers are unaware of this rule and mistakenly believe their basis to be the value of the gift when they receive it.
Larry buys stock for $1,000 and gives it to a relative (Ellen) when it’s worth $8,000. Ellen later sells it for $11,000. Ellen’s basis in the stock is only $1,000, the same basis Larry had. So, Ellen must report $10,000 of gain on the sale.
Note: If Ellen had sold the property for just $6,000, Ellen would still have to report a gain (of $5,000 on her $1,000 basis), even though the property declined in value in Ellen’s hands. Ellen would only be able to report a loss if they were to sell it for less than $1,000.
Loss on Gift Property
Special rules apply for property which has gone down in value in the hands of the donor. For such property, at the time of the gift, the donor’s basis (cost) will be higher than the value of the property.
In this case, you must keep track of two figures for basis purposes. To measure gain on a later sale, the general carryover basis rule applies and your basis is the same that the donor had. But to measure loss on a later sale, your basis is limited to the (lower) value of the property at the time of the gift.
Ken buys stock for $12,000 and gives it to a relative (Sam) when it’s worth $8,000. Sam later sells it for $6,000. To measure loss, Sam’s basis in the stock is $8,000, the value of the stock on the date of the gift. So, Sam has only a $2,000 loss on the sale.
The facts are the same as in Example 1, except that Sam sells the stock for $15,000. To measure gain, Sam’s basis is $12,000, the same basis Ken had. Thus, Sam’s gain is $3,000.
Under these rules, if a donee of loss property sells it for an amount in between the property’s date of gift basis and (lower) value, there will be no gain or loss on the sale.
The facts are the same as in Example 1, except that Sam sells the stock for $10,000. Here, to measure Sam’s loss, Sam’s basis would be $8,000, so there’s no loss on the sale for $10,000. Similarly, to measure Sam’s gain, Sam’s basis would be $12,000, so there’s no gain on a sale for $10,000. So, Sam would report no gain or loss.
Did the Donor Pay Gift Tax?
If the value of the gift is more than $16,000 (the gift tax annual exclusion for 2022), the donor may have paid federal gift taxes on it.
If this is the case and the property had appreciated in value in the donor’s hands, you’ll be able to increase your basis. The rule is you add to your basis that portion of the gift tax paid which is allocable to the increase in value at the date of the gift.
Larry buys stock for $50,000 and gives it to Denise when its value is $150,000. Larry pays $30,000 in federal gift tax on the transfer. The increase in value ($100,000) is two-thirds of the value of the gift.
So, this will increase Denise’s basis in the stock by $20,000 (two-thirds of the $30,000 in gift tax paid). Denise’s total basis is thus $70,000: the $50,000 carryover basis, plus the $20,000 under the gift tax rule.
Getting Basis Information from the Donor
It’s important to get the basis information you need from the donor. Many donors include this in the cover letter that accompanies the gift.
If you didn’t get the basis from the donor, you may find it awkward to say, “Thanks for the generous gift, what did you pay for it?”
It often makes sense to have your accountant reach out to the donor on your behalf to explain the need from the tax standpoint.
After receiving a gift, get the basis information you need as soon as possible: the donor may destroy the records needed to establish basis once he or she has given away the property.
If you can’t establish basis, IRS can impose a zero basis, in which case you’ll have to report the entire sale price as gain. Don’t put yourself at risk of having to pay more taxes.
View IRS information on basis of gift property.
If you have questions, contact us to discuss your situation.
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