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What is the Basis for Gifted Property?
Buying and selling property can be complicated for a number of reasons. One important consideration when selling real property is whether or not the sale will incur capital gains taxes. Capital gains tax is the tax which is levied by the federal government when the sale of real property results in a gain, or profit, to the seller. The capital gains tax rate depends on the income bracket of the seller and is also subject to change from time to time. In order to know what you will owe in capital gains taxes, you must know what basis to use in your calculations. If the property was gifted, you are typically required to use the donor’s basis when calculating the amount of gain realized by the sale.
As a general rule, capital gains taxes are computed by determining the basis of the property and then subtracting that from the sales price. The basis is usually the price that you originally paid for the property, although there are some adjustments that can be made to that figure. For example, if you purchased real property 20 years ago for $50,000 and recently sold it for $170,000 then your basis would be $50,000 and your gain would be $120,000. Capital gains taxes would then be figured on the $120,000 gain.
If the property was gifted to you, your basis will be the same as the donor’s adjusted basis at the time the property was gifted to you. If the donor paid any gift taxes as a result of the gift, your basis may be increased as a result. If, however, the fair market value at the time of the gift is less than the donor’s basis, then your basis will be the fair market value at the time of the gift. Because this can often result in a substantial capital gains tax obligation for the receiver of the gifted property, leaving the property as an inheritance should be considered when applicable. When property is received as an inheritance, the basis is the fair market value on the date the property is valued after the death of the decedent which is typically much higher than the decedent’s basis would have been had he or she gifted the property to you.
As a general rule, capital gains taxes are computed by determining the basis of the property and then subtracting that from the sales price. The basis is usually the price that you originally paid for the property, although there are some adjustments that can be made to that figure. For example, if you purchased real property 20 years ago for $50,000 and recently sold it for $170,000 then your basis would be $50,000 and your gain would be $120,000. Capital gains taxes would then be figured on the $120,000 gain.
If the property was gifted to you, your basis will be the same as the donor’s adjusted basis at the time the property was gifted to you. If the donor paid any gift taxes as a result of the gift, your basis may be increased as a result. If, however, the fair market value at the time of the gift is less than the donor’s basis, then your basis will be the fair market value at the time of the gift. Because this can often result in a substantial capital gains tax obligation for the receiver of the gifted property, leaving the property as an inheritance should be considered when applicable. When property is received as an inheritance, the basis is the fair market value on the date the property is valued after the death of the decedent which is typically much higher than the decedent’s basis would have been had he or she gifted the property to you.
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