Determining The Basis Of Gift Property         

Whenever property is purchased outright, most people know that their basis in the property is generally the price paid for it. Things can get a little more complicated however, when you acquire property by means of a gift. Your basis depends on several factors.

 

Depreciation purposes

For depreciation purposes, your basis is the donor's adjusted basis at the time of the gift increased by a portion of the gift tax paid, if any. However, the basis cannot be more than the fair market value at the time of the gift. 

 

The basis cannot be more than the fair market value at the time of the gift.

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 $14,000 or less for the year ($28,000 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 $5.34 million in 2014. 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. 

See 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.

Holding period

The donee's holding period includes the donor's holding period.

Examples. We'll try to keep the examples simple. All assume that no gift tax is payable.

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