Question

How do we determine the taxpayer's basis in the property received by gift? Are there other circumstances when the rules are different from the general rule in determining a taxpayer's basis?

Answer 1

The taxpayer's basis in the property as a Gift: To determine the gain/loss on a subsequent disposition of property received as a gift, the taxpayer needs to consider:

1 . The adjusted basis of the gift to the Donor just before it was given to the taxpayer

2 . The FMV of the gift at the time it was given to the taxpayer, and

3 . Any gift tax paid which has already been paid on appreciation of the value of property while held by the Donor (in opposition to gift tax offset by the donor's applicable amount of credit).

When the taxpayer sells property received as a gift, he computes gain based upon the adjusted basis by donor plus any amount of gift tax Paid on the appreciation. When same property was sold at a loss, the taxpayer's basis would be the lower of the Donor's Adjusted Basis or FMV at the time. Usually, the gift's value is its FMV on the date of the gift. But the gift's value can be less than its FMV to the extent that the donee gives the donor something.

There is important exception when FMV at the date of the gift is lesser than the donor's Basis, the "Double Basis Rule" will be applicable which states that for property sold with losses - use the FMV of the property; and for property sold with gains - use adjusted basis of donor.