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. Taxes

    How to Avoid Gift Taxes

    For most, the answer to the question, “How much is the gift tax?” can be “nothing."
  2. Taxes

    What Are Gift Taxes?

    If you're not sure what gift taxes are, read on and we'll explain.
  3. Retirement

    4 Thoughtful Retirement Gift Ideas for Men

    This"best gifts list" of the most thoughtful retirement gifts for men includes items appropriate as gifts from co-workers, friends or family members.
  4. Personal Finance

    How To Get Gift Cards At A Discount

    Use these tips whether you're buying someone a gift or just want to score a discount at your favorite stores.
  5. Investing

    How Safe Are Discounted Gift Card Websites?

    Could you buy a gift card online and find out it's worthless? Here's how to protect yourself (and whether you need to).
  6. 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.
  7. Taxes

    Keep Gifts Simple and Meaningful This Season

    Sometimes simple gift ideas are the best.
  8. Taxes

    7 Sources Of Nontaxable Income

    All income in the United States is taxable, unless a provision specifically excludes it. Here are seven of those exceptions.
  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. Is There a Difference Between the Equity Market and the Stock Market?

    Equities and stocks refer to the same thing.
  2. What Happens to a Company's Stock When it Goes Bankrupt?

    Shareholders may be entitled to a portion of the liquidated assets in the wake of a bankrutpcy, but the stock will be worthless.
  3. What are Advantages and Disadvantages of Preference Shares?

    Preference shares have advantages and disadvantages for both investors and issuing companies.
  4. When am I eligible to receive Social Security benefits?

    Understand when you are eligible to begin collecting Social Security retirement benefits and how retiring at different ages ...
Trading Center