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