3.3 Income Tax Basis in Gift Property

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

3.3 Income Tax Basis in Gift Property

When property is given to a donee, it is required that the donor's adjusted income tax basis be used by the donee as his or her own income tax basis in the prop-erty.³⁷ The adjusted basis can be increased for any federal gift tax that is attributable to the portion of the gift that represents appreciation in the value of the gift property.³⁸

Example: Property valued at $100,000 is given to a donee. The donor's adjusted income tax basis in the property is $10,000, and the gift tax paid on the gift is $40,000 (assuming a 40% rate and prior use of the entire exclusion amount). The donee will have an adjusted basis in the property of $46,000: the donor's adjusted basis of $10,000 plus the gift tax on the $90,000 appreciation, which is $36,000 ($40,000 x $90,000 / $100,000).

When the donor later sells the gift property at a gain, he or she then will pay income tax on the difference between the sales price and the adjusted basis of the property. In the event the property is sold at a loss, the donee's adjusted basis is modified somewhat, to the lesser of either the donor's adjusted basis or the fair market value of the property at the time of the gift.³⁹

Example: The donee in the preceding example later sells the property for $110,000. The taxable gain for income tax purposes is $64,000.

Example: The donor gives property with a fair market value of $50,000, in which the donor has an adjusted basis of $100,000, to the donee. While the donee's basis for purposes of...