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Basis of Gifted Property

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The Basis of Property Received as a Gift


Understanding the basis of property received as a gift is essential in figuring out your potential gain or loss when disposing of that property. This article provides an up-to-date guide to help you navigate through this critical topic.

Determining the Basis of Your Gifted Property

When you receive property as a gift, the basis of that property is determined by three crucial amounts:

  1. The adjusted cost basis to the donor just before the gift was made.
  2. The fair market value (FMV) of the property at the time the gift was made.
  3. The amount of any gift tax paid on Form 709 by the donor.

The FMV is Less Than the Donor’s Adjusted Basis

In scenarios where the FMV of the property at the time of the gift is less than the donor’s adjusted basis, your basis depends on whether you have a gain or loss when you dispose of the property.

  • Your basis for figuring a gain is the same as the donor’s adjusted basis, plus or minus any required adjustments to the basis while you held the property.
  • Conversely, your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to the basis while you held the property.

In situations where you use the donor’s adjusted basis to figure a gain and get a loss, and then use the FMV to figure a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.

For example, a donor gives property worth $4,000 with an adjusted basis of $6,000 to a taxpayer.

  • Your basis would be $6,000 if the taxpayer had a gain on the sale.
  • Your basis would be $4,000 if the taxpayer had a loss on the sale.
  • If the taxpayer sells property for $5,000, there is no gain or loss on the sale, and the basis is $5,000.

The FMV is Equal to or Greater Than the Donor’s Adjusted Basis

If the FMV is equal to or greater than the donor’s adjusted basis, your basis is the donor’s adjusted basis at the time you received the gift plus any gift tax paid.

Gift Tax Exclusion Amounts in 2023

Understanding the gift tax exclusion amount is key to knowing how much gift tax, if any, was paid on the property, which can impact your basis. As of 2023, the annual gift tax exclusion amount is $17,000, or $34,000 per married couple. This means that an individual can give up to $17,000 (or a married couple can give a total of $34,000) in annual exclusion gifts to any person without incurring the gift tax. Furthermore, the federal lifetime exemption amount is $12,920,000 as of 2023. This is the total amount that can be given away by an individual over their entire lifetime to any number of people without incurring gift taxes.

Recent Changes to Basis Adjustments

As per Rev. Rul. 2023-2 released by the IRS, assets of an irrevocable grantor trust not includable in the grantor’s gross estate do not receive a basis adjustment under Internal Revenue Code Section 1014. This means that at the grantor’s death, the basis of the trust assets would be the same as they had immediately before the grantor’s death.

Understanding how the basis of gifted property is determined can be complex, but it is essential for accurately reporting any gain or loss on the disposal of the property. By keeping these principles in mind, you can better navigate your tax obligations and potentially optimize your tax situation. As always, for complex tax issues, don’t hesitate to reach out to DimovTax for expert advice.

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