Property Acquired by Gift or Through an Estate

Crystal Chang, CPA

The recipient of a gift or a bequest pays no gift or estate tax. Those taxes, if they are due, are payable by the donor (the person making the gift) or the estate in the case of a decedent. Generally, no gift tax is due for gifts to any one person that do not exceed $11,000 in any one year ($22,000 if the gift is given jointly by a husband and wife).

Gift. Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. However, the basis for loss is the basis so determined or the fair market value of the property at the time of the gift, whichever is lower. In some cases, there is neither gain no loss on the sale of property received by gift because the selling price is less than the basis for gain and more than the basis for loss.

Case 1. Rich Uncle gives stock worth $3,000 and having an adjusted basis of $5,000 to Nephew, who subsequently sells the stock for $6,500. Nephew’s gain will be $1,500 ($6,500 proceeds minus $5,000 basis).

Case 2. The same as case 1, except that Nephew sells the stock for $1,000. Nephew’s loss will be $2,000 ($3,000 value of gift at the time of donation minus $1,000.)

Case 3. The same as case 1, except that Nephew sells the stock for $3,500. Nephew will have neither gain nor loss on the transaction.

The receipt of the gift normally assumes the donor’s holding period. However, if fair market value at the time of gift is used (loss basis) as the basis of the gift, the holding period starts as of the date of the gift.

Inherited property. Generally, the basis of any property, real or personal, acquired from a decedent is its fair market value on the date of the decedent’s death or on the alternate valuation date selected by the estate for estate tax purposes six months after death.

Case 4. Rich Uncle died owning land worth $20,000 and in which he had a basis of $5,000. Nephew inherited the land and subsequently sold it for $25,000. The nephew will recognize a capital gain of $5,000 ($25,000 proceeds minus $20,000 basis). The gain inherent in the property at the time of Rich Uncle’s death goes unrecognized.

Case 5. The same as case 4, except that the land had not been distributed and was worth $22,000 six months later. Nephew sold the land for $25,000, the capital gain will be $5,000 ($25,000 - $20,000) assuming the alternate valuation date was not elected; the capital gain will be $3,000 ($25,000 - $22,000) assuming the alternate valuation date was elected.

Property acquired from a decedent is automatically considered to be long-term property regardless of how long it actually has been held.

If you have any further questions on this topic, or how the rules apply to your specific situation. Please do not hesitate to call.

Canady & Canady P.C. provides audit and tax services for associations, individuals and small businesses.