The amount of the tax that's added to
the donor's basis is equal to the tax multiplied by a ratio equal to the net appreciation
in value of the gift divided by the amount of the gift. The net appreciation in value is
the difference between the fair market value at the time of the gift less the donor's
adjusted basis in the property.
Amount of gift tax.
A donor can avoid all gift taxes if the total gifts
to the donee are $12,000 or less for the year ($24,000 if your spouse consents to the
gift), there is no gift tax. (Remember, when computing the gift tax, you must use the fair
market value at the date of the gift.)
There's also no tax if you decide to use your
lifetime unified estate and gift tax credit of equivalent to $1 million in
2007. So in many
cases you should be able to avoid any tax.
Basis for computing gain or loss.
If you sell the asset, your basis is
generally the same as the donor's adjusted basis (plus any gift tax paid). However if the
basis is greater than the fair market value at the time of the gift, then, for purposes of
determining loss, the basis is equal to the fair market value at the time of the gift.
the examples below. In the case of depreciable property sold at a loss, any depreciation
you claim is subtracted from the fair market value at the time of the gift.
The donee's holding period includes the donor's holding
Examples. We'll try to keep the examples simple. All assume that no gift tax is
Example--Fred gives his daughter Beth land he purchased for $1,000. At
the time of the gift the fair market value is $10,000. She sells the property 2 years
later for $12,000. She has a long-term capital gain of $11,000.
Example--Fred gives his son Mike land he purchased for $11,000. At the
time of the gift the land is worth $7,000. Mike sells the land 2 years later for $6,000.
Mike has a long-term capital loss of $1,000. If Mike sells the land for $8,000, he'll have
a long-term capital gain of $1,000.
If you're considering gifting property, things can get pretty complicated. For
example, assume in the examples above that Fred didn't purchase the property. Instead, his
wife purchased it and left it to him in her will. Fred's basis would be the fair market
value at the date of his wife's death.
Let us work through the numbers with you. You might want to reconsider the
gift. While it may still make sense, you just might want to choose a different property,
or sell the property and make a cash gift. And keep in mind that your heir's basis in the
property will generally be the fair market value at your death