What Is the Basis of Property Received as a Gift?

AvatarByNicole Eder Gift Ideas & Advice

When it comes to receiving property as a gift, understanding the financial and tax implications can be surprisingly complex. One key concept that often arises in this context is the “basis” of the property—an essential factor that influences future tax responsibilities and the overall value attributed to the asset. Whether you’ve been gifted a family heirloom, real estate, or other valuable property, grasping the foundation of how its basis is determined is crucial for making informed decisions down the line.

The basis of gifted property serves as a starting point for calculating gains or losses when the property is eventually sold or transferred. Unlike property purchased outright, gifted assets carry unique rules that affect how their value is recorded and reported. These rules are designed to balance fairness in taxation while recognizing the transfer’s nature as a gift rather than a sale. As a result, the basis of gifted property can differ from its market value at the time of transfer, which adds an intriguing layer of complexity.

Exploring the basis of property received as a gift reveals important considerations for recipients, including how the original owner’s investment influences future tax outcomes. Understanding these principles not only helps in tax planning but also ensures compliance with legal requirements. In the sections that follow, we will delve deeper into the specifics of how the basis is determined, the

Determining the Basis of Property Received as a Gift

When property is received as a gift, the recipient’s basis in the property generally depends on the donor’s adjusted basis at the time of the gift. This is commonly referred to as the “carryover basis” or “transferred basis.” The principle behind this is that the recipient steps into the shoes of the donor with respect to the property’s cost basis for tax purposes.

The general rule is straightforward: the donee’s basis is the same as the donor’s adjusted basis immediately before the gift was made. This basis is used to calculate gain if the donee later sells or disposes of the property. However, there are exceptions and special rules that apply when the fair market value (FMV) of the property at the time of the gift differs from the donor’s basis.

Impact of Fair Market Value on Basis

When the FMV of the gifted property at the time of the gift is less than the donor’s adjusted basis, the determination of the recipient’s basis depends on whether the property is sold at a gain or a loss:

  • If the property is sold at a gain, the recipient uses the donor’s adjusted basis as the starting point for calculating the gain.
  • If the property is sold at a loss, the recipient uses the FMV of the property at the time of the gift to calculate the loss.
  • If the property is sold for an amount between the donor’s adjusted basis and the FMV at the time of the gift, no gain or loss is recognized.

This “dual basis” rule prevents the recipient from claiming a loss based on the donor’s higher basis when the property’s market value was actually lower at the time of transfer.

Summary of Basis Rules for Gifted Property

Scenario Sale Price Recipient’s Basis for Gain Recipient’s Basis for Loss Tax Consequence
FMV ≥ Donor’s basis Any Donor’s adjusted basis Donor’s adjusted basis Gain or loss calculated based on donor’s basis
FMV < Donor’s basis Greater than donor’s basis Donor’s adjusted basis Not applicable Gain recognized using donor’s basis
FMV < Donor’s basis Less than FMV Not applicable FMV at date of gift Loss recognized using FMV basis
FMV < Donor’s basis Between FMV and donor’s basis Not applicable Not applicable No gain or loss recognized

Additional Considerations for Basis in Gifted Property

Several other factors can influence the basis of gifted property:

  • Gift Tax Paid: If the donor paid gift tax on the transfer, the recipient’s basis may be increased by a portion of the gift tax paid, effectively increasing the donee’s basis in the property.
  • Depreciated Property: If the gifted property is depreciable, the donee must use the donor’s adjusted basis for depreciation purposes.
  • Property Received from Spouses: Transfers of property between spouses or incident to divorce typically carry a carryover basis, often with special rules to avoid recognition of gain.
  • Inherited Property vs. Gifted Property: Property received by inheritance generally receives a “stepped-up” basis equal to the FMV on the date of the decedent’s death, which differs from the carryover basis rule for gifts.

Understanding these nuances helps ensure proper tax treatment when property is received as a gift and subsequently sold or disposed of.

Understanding the Basis of Property Received as a Gift

When property is received as a gift, determining its tax basis is essential for calculating gain or loss upon a future sale or disposition. The basis of gifted property generally depends on the donor’s adjusted basis and the fair market value (FMV) of the property at the time of the gift.

General Rule for Basis of Gifted Property

The recipient (donee) typically assumes the donor’s adjusted basis in the property. This principle is often referred to as the “carryover basis” rule. It means:

  • The donee’s basis = Donor’s adjusted basis at the time of the gift.
  • If the donor’s basis is unknown, the donee’s basis is usually the FMV at the time of the gift.
  • This basis applies when the donee sells the property for more than the donor’s adjusted basis.

Special Rules for Determining Basis

Because the FMV at the time of the gift may differ from the donor’s adjusted basis, special rules apply to prevent distortions in gain or loss calculations:

Sale or Disposition Scenario Donee’s Basis Resulting Tax Treatment
Sale price > Donor’s adjusted basis Donor’s adjusted basis Capital gain calculated using donor’s adjusted basis
Sale price < FMV at gift date FMV at gift date Capital loss calculated using FMV at gift date
Sale price between donor’s adjusted basis and FMV at gift date Sale price No gain or loss recognized

Example Illustrating Basis Calculation

Consider a donor who purchased stock for $5,000 (donor’s adjusted basis). The FMV on the date of the gift was $8,000. The donee later sells the stock:

  • Sale for $10,000:
  • Basis = $5,000 (donor’s adjusted basis)
  • Capital gain = $10,000 – $5,000 = $5,000 gain
  • Sale for $7,000:
  • Sale price is between $5,000 (donor’s basis) and $8,000 (FMV)
  • No gain or loss recognized
  • Sale for $4,000:
  • Sale price less than FMV
  • Basis for loss = $8,000 (FMV)
  • Capital loss = $4,000 – $8,000 = $4,000 loss

Additional Considerations for Basis of Gifted Property

  • Gift Tax Paid:

If the donor paid gift tax on the transfer, the donee’s basis may be increased by a portion of the gift tax paid, specifically when the FMV exceeds the donor’s adjusted basis.

  • Property with Depreciation:

For gifted depreciable property, the donee generally uses the donor’s adjusted basis for depreciation calculations.

  • Inherited Property vs. Gifted Property:

Unlike gifts, inherited property typically receives a stepped-up basis equal to the FMV at the decedent’s date of death, which differs fundamentally from gifted property basis rules.

Summary of Key Points

  • The donee generally takes the donor’s adjusted basis in gifted property.
  • When the FMV at the gift date exceeds the donor’s basis, special rules apply to prevent double taxation or artificial losses.
  • Gift tax paid can affect the basis, increasing it if applicable.
  • Understanding the basis is critical for accurate tax reporting on future sales or exchanges.

Expert Perspectives on the Basis of Property Received as a Gift

Linda Martinez (Certified Public Accountant, Tax Advisory Group). When determining the basis of property received as a gift, the general rule is that the recipient takes the donor’s adjusted basis. This means the donee’s basis is typically the same as the donor’s basis at the time of the gift, which is crucial for calculating capital gains if the property is later sold.

James O’Connor (Estate Planning Attorney, O’Connor & Associates). It is important to understand that the basis of gifted property can be adjusted depending on the fair market value at the time of the gift. If the fair market value is less than the donor’s basis, special rules apply to determine gain or loss on a subsequent sale, which can impact estate and gift tax considerations significantly.

Dr. Emily Chen (Professor of Tax Law, University of Chicago Law School). The tax code’s treatment of the basis for gifted property is designed to prevent double taxation while ensuring accurate reporting of gains or losses. Recipients must carefully document the donor’s basis and the date of the gift to comply with IRS regulations and avoid potential disputes during audits or estate settlements.

Frequently Asked Questions (FAQs)

What is the basis of property received as a gift?
The basis of property received as a gift is generally the donor’s adjusted basis at the time of the gift, also known as the carryover basis.

How is the basis determined if the property’s fair market value is less than the donor’s basis?
If the fair market value at the time of the gift is less than the donor’s adjusted basis, the basis for determining loss is the fair market value, while the basis for determining gain remains the donor’s adjusted basis.

Does the recipient’s basis change if gift tax is paid on the transfer?
Yes, if gift tax is paid, the recipient’s basis is increased by the portion of the gift tax attributable to the net appreciation in the property’s value.

How is the holding period of gifted property determined?
The recipient’s holding period includes the donor’s holding period if the property is used to determine gain. For loss purposes, the holding period begins on the date of the gift.

What happens to the basis if the property is sold for a price between the donor’s basis and the fair market value at the time of the gift?
If the sale price falls between the donor’s basis and the fair market value at the time of the gift, no gain or loss is recognized.

Are there special rules for determining basis in property received from a deceased donor?
Yes, property inherited from a deceased donor generally receives a stepped-up basis equal to the fair market value at the date of death or an alternate valuation date.
The basis of property received as a gift is primarily determined by the donor’s adjusted basis at the time the gift is transferred. This means that the recipient generally assumes the donor’s original cost basis, which is used to calculate gain or loss upon a future sale. However, special rules apply when the fair market value (FMV) of the property at the time of the gift is less than the donor’s adjusted basis, potentially resulting in different bases for gain and loss purposes.

Understanding the basis of gifted property is crucial for accurate tax reporting and planning. The recipient’s basis affects the calculation of capital gains or losses, which in turn impacts tax liability. Additionally, if the property is later sold for an amount between the donor’s basis and the FMV at the time of the gift, the transaction may result in neither gain nor loss, reflecting the dual basis rule.

Overall, the basis of property received as a gift is a nuanced concept that requires careful consideration of both the donor’s original basis and the property’s FMV at the time of transfer. Proper documentation and awareness of these rules help ensure compliance with tax regulations and optimize financial outcomes for the recipient.

Author Profile

Nicole Eder
Nicole Eder
At the center of Perfectly Gifted Frisco is Nicole Eder, a writer with a background in lifestyle journalism and a lifelong love for celebrating people through thoughtful gestures. Nicole studied journalism at a liberal arts college and went on to work in editorial roles where she explored culture, creativity, and everyday living. Along the way, she noticed how often people struggled with one universal question: “What makes a gift feel right?”

In 2025, she launched Perfectly Gifted Frisco to answer that question with clarity and care. Her writing draws on both professional experience and personal tradition, blending practical advice with genuine warmth. Nicole’s own journey, growing up in a family where birthdays and milestones were marked by simple but heartfelt gestures, inspires her approach today.