Tax Tip: Gifts and Liability.

• Author: Harrison, Robert E.

Taxpayers generally are not subject to income or gift taxes when they receive a gift. However, when the gift is property, recipients should be aware of the possible tax liability related to their ownership. Obviously, any taxable income generated by a gift after a transfer must be reported on a recipient's tax return. The recipient also should consider any related tax liability in his or her tax planning. Therefore, CPAs should know the holding period and tax basis rules related to property received as a gift.

Recipients of appreciated gifts are considered by the IRS to have a holding period that includes the time the property was held by the donor. For example, a donor acquired appreciated property on January 15, 1995, and gifted the property to her son on June 30, 1999. The son's holding period is considered to have started on January 15, 1995. Therefore, the property is considered an appreciated capital asset in the hands of the son, and he can sell it at any time. If the property continues to increase in value, he can recognize the increase as a favorably taxed long-term capital gain.

The tax basis rules for gift recipients are more complicated. For the purpose of determining the gain on a sale of gifted property, the recipient's tax basis is the same as the donor's, but it can be increased by a portion of the donor's gift tax that was already paid. However, in determining loss, the recipient's tax basis is the lesser of (a) the donor's tax basis or (b) the fair market value of the property at the time of the gift.

For example, a donor holds 100 shares of stock with a basis of $1,000 and a fair market value of $900. She gifts these shares to her son. If the son sells the 100 shares for $1,200, his taxable gain will be $200. If he sells the 100 shares for $600, his tax loss will be $300 ($900 minus...