Basis of Property Received by Gift and in Nontaxable Transactions
A gift is property received by someone where nothing is given up in return. In most cases, the basis of the gifted property to the recipient is the same as the adjusted basis of the donor. However, the basis could be affected by the following factors:

  • Fair market value (FMV) of the property
  • Date of the gift
  • Donor's basis in the property
  • Amount (if any) of gift tax paid

If the FMV of the gift equaled or exceeded the donor's adjusted basis at the time of the gift, the basis of the gift to the recipient is the donor's adjusted basis plus a part of the gift tax paid (if any).

Suppose Dad gifts 100 shares of XYZ stock with a $5,000 FMV (on the date of the gift) to his son. Dad paid $4,000 for the shares (his adjusted basis). No gift tax was required or paid. Son's basis for the gifted stock would be $4,000. If Son sells the stock for $5,000, he will have a $1,000 capital gain.

*Important Exception* -- When FMV at the date of the gift is LESS THAN the donor's Basis:


"Double Basis Rule"
For property sold with gains - use adjusted basis of donor
For property sold with losses - use the FMV of the property

Example:
John received a gift of land with a FMV of $10,000 (at the time of the gift) from his Uncle Mike. Uncle Mike's adjusted basis in the land is $13,000.

  1. If John sells the land between $10,000 and $13,000, he would have no gain or loss.
  2. If John sells the land for $15,000 (gain), he would have a $2,000 gain (use $13,000 basis).
  3. If John sells the land for $7,000 (loss), he would have a $3,000 loss (use $10,000 FMV).

Adding in the Gift Tax to Determine the New Basis:
If the FMV of the gift exceeds the adjusted basis and a gift tax is paid by the owner, the recipient can add a portion of the gift tax paid to their new basis.

Formula: New Basis = Original Basis + [(Appreciation / FMV) x Gift Tax]

Example:
Tim gave Becky stock with a FMV of $100,000. Tim originally paid $40,000 for the stock and paid $20,000 in gift tax when gifting the stock to Becky. What is Becky's new basis in the stock?

Original Basis = $40,000
Appreciation = $60,000
FMV = $100,000
Gift Tax = $20,000

$40,000 + [($60,000 / $100,000) x $20,000) = New Basis
$52,000 = New Basis for Becky



Basis of Inherited Property (Community and Non-Community Property)

Related Articles
  1. Financial Advisor

    How to Gift Your Way to Lower Estate Taxes

    Estate planning is not just for inheritance. High net-worth individuals, who plan properly, can gift their money and save on taxes.
  2. Personal Finance

    6 Tips For Getting The Most Out Of Gift Cards

    Gift cards are big business, amounting to an estimated $91 billion in annual retail spending. Get the most bang for your gift card buck.
  3. Insights

    Why Retailers Love Gift Cards

    Gift cards have many benefits for retailers compared to cash sales. We'll look at a few of them.
  4. Personal Finance

    How to Talk to Your Family About Christmas Gift Budgets

    Talking Christmas gift budgets with family members can be hard, but having the talk will help you stay on track financially.
  5. Insights

    Gifts For People You Aren't That Close To

    Finding a gift for a new boyfriend or girlfriend, your boss, or the postman can sometimes be a challenge.
  6. Taxes

    Keep Gifts Simple and Meaningful This Season

    Sometimes simple gift ideas are the best.
  7. Personal Finance

    Ways To Get Free Christmas Gifts (or at least cheaper ones)

    Christmas shopping can be expensive, but there are ways to get gifts free or nearly free.
  8. Taxes

    How to Give a Tax-Saving Gift Before The Year Ends

    Giving to charity and family members before year-end can help you save on 2016 taxes.
  9. Taxes

    10 Sources of Nontaxable Income

    Taxes are often a deterrent from investing and saving. These financial practices will bring you no tax grief.
Frequently Asked Questions
  1. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ...
  2. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually ...
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  4. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
Trading Center