How to Determine Basis for Property Received as a Gift

When someone receives property as a gift, understanding how to figure out the property’s “basis” is very important. The basis is the starting value used to calculate any gain or loss when the property is later sold. This can affect how much tax someone pays. The rules for figuring out the basis of gifted property are detailed, and it’s important to follow them closely to avoid mistakes. Here, you’ll find a clear overview of who these rules apply to, the detailed eligibility criteria, required documentation, the application process, and practical tips for meeting all requirements.

Who Qualifies for Gifted Property Basis Rules

These rules apply to anyone who receives property as a gift. This includes:

• U.S. citizens and residents who are given property by another person, whether that person is a family member, friend, or anyone else.
• Non-citizens who receive gifts from U.S. persons may also be subject to these rules, especially if the property is located in the United States 🇺🇸.
• Trusts and estates that receive property as a gift must also use these rules to figure out the basis.

The rules do not apply to property received by inheritance (which has different basis rules) or property bought for money.

Detailed Eligibility Criteria and Key Terms

To use the gifted property basis rules, the following must be true:

• The property was received as a gift, not purchased or inherited.
• The donor (the person giving the gift) must provide information about their own adjusted basis in the property.
• The fair market value (FMV) of the property at the time of the gift must be known.
• If any gift tax was paid on the transfer, the amount must be documented.

Let’s break down the key terms:

• Donor’s adjusted basis: This is what the donor originally paid for the property, plus or minus certain adjustments (like improvements or depreciation).
• Fair market value (FMV): This is the price the property would sell for on the open market at the time the gift was given.
• Gift tax: This is a tax that may be paid when someone gives property worth more than the annual exclusion amount. The donor usually pays this tax, not the recipient.

How the Basis is Determined: Step-by-Step

The basis you use depends on the relationship between the donor’s adjusted basis and the FMV at the time of the gift. Here’s how it works:

1. If FMV is equal to or greater than the donor’s adjusted basis:

• Your basis is the same as the donor’s adjusted basis.
• If the donor paid gift tax, your basis may be increased by a portion of that tax.

2. If FMV is less than the donor’s adjusted basis:

• If you sell the property at a gain (for more than the donor’s adjusted basis), use the donor’s adjusted basis to figure your gain.
• If you sell the property at a loss (for less than the FMV at the time of the gift), use the FMV at the time of the gift to figure your loss.
• If you sell the property for an amount between the FMV and the donor’s adjusted basis, you do not report any gain or loss.

Example:

Suppose you receive a piece of land as a gift.

• Donor’s adjusted basis: $10,000
• FMV at the time of gift: $8,000

If you later sell the land for:

• $12,000: You have a gain of $2,000 (use donor’s adjusted basis).
• $7,000: You have a loss of $1,000 (use FMV at time of gift).
• $9,000: No gain or loss is reported (sale price is between FMV and donor’s adjusted basis).

This rule prevents someone from transferring a loss to another person by giving away property that has gone down in value.

3. If gift tax was paid:

If the donor paid gift tax on the transfer, your basis may be increased. The increase is based on the net increase in value (FMV minus donor’s adjusted basis) and the amount of gift tax paid.

The formula is:

Basis increase = Gift tax paid × (Net increase in value ÷ Taxable amount of gift)

• Net increase in value = FMV at time of gift – donor’s adjusted basis
• Taxable amount of gift = FMV at time of gift – annual exclusion

Example with Gift Tax:

You receive property from your mother.

• Mother’s adjusted basis: $20,000
• FMV at time of gift: $35,000
• Gift tax paid: $7,100
• Net increase in value: $35,000 – $20,000 = $15,000
• Taxable amount of gift: $35,000 (assuming no annual exclusion for simplicity)

Basis increase: $7,100 × ($15,000 ÷ $35,000) = $3,043

Your basis: $20,000 + $3,043 = $23,043

Required Documentation

To properly figure out your basis, you’ll need to collect and keep several important documents:

• Proof of donor’s adjusted basis: This could be the donor’s purchase records, improvement receipts, or prior tax returns.
• Appraisal or evidence of FMV at the time of the gift: This might be a professional appraisal, real estate listing, or other documentation showing the property’s value.
• Gift tax return (IRS Form 709): If the donor filed a gift tax return, get a copy. This will show the amount of gift tax paid.
• Any records of improvements or depreciation: If the property was improved or depreciated while you owned it, keep these records too.

You can find the official IRS Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) here.

Application Process Overview

There is no formal “application” to receive a basis in gifted property. Instead, you must follow these steps to make sure you use the correct basis when you later sell or dispose of the property:

1. Get the donor’s adjusted basis: Ask the person who gave you the property for their records. If they don’t have them, try to reconstruct the basis using purchase records, improvement receipts, or tax returns.
2. Determine the FMV at the time of the gift: Get an appraisal or use other evidence to show what the property was worth when you received it.
3. Find out if gift tax was paid: Ask the donor if they filed a gift tax return and, if so, how much tax was paid.
4. Calculate your basis: Use the rules above to figure out your basis, including any increase for gift tax paid.
5. Track your holding period: If you use the donor’s basis, your holding period includes the donor’s holding period. If you use FMV (for a loss), your holding period starts the day after you received the gift.
6. Report gain or loss when you sell: When you sell the property, use your calculated basis and holding period to figure out your gain or loss on your tax return.

For more details, see the IRS’s official guidance in Publication 551 (Basis of Assets).

Practical Tips for Meeting Requirements

• Keep all records: Save copies of all documents related to the gift, including appraisals, gift tax returns, and proof of the donor’s basis. You may need these years later when you sell the property.
• Ask for help early: If you’re not sure how to get the donor’s adjusted basis or FMV, ask a tax professional or the donor as soon as you receive the gift.
• Understand the impact of gift tax: If the donor paid gift tax, make sure you know how much of it applies to your basis. This can make a big difference in your future taxes.
• Don’t assume the basis is always FMV: Many people think the basis of a gift is always its value when received, but that’s not true. The donor’s adjusted basis is often used, especially if the property has gone up in value.
• Be careful with losses: If the property has gone down in value, you may not be able to claim a loss if you sell it for more than the FMV at the time of the gift but less than the donor’s adjusted basis.
• Check for recent changes: Although the IRS has not changed these rules in 2024 or 2025, always check the latest IRS publications or consult a professional before selling gifted property.

Common Concerns and Questions

What if I can’t get the donor’s adjusted basis?

If you can’t get this information, you may have trouble figuring out your gain or loss when you sell the property. The IRS may treat your basis as zero, which could mean paying more tax. Try to get as much information as possible from the donor or their records.

Does the donor’s holding period always transfer to me?

Only if you use the donor’s adjusted basis to figure your gain. If you use FMV to figure a loss, your holding period starts the day after you receive the gift.

What if the donor paid gift tax on only part of the gift?

Only the portion of the gift tax that applies to the net increase in value (FMV minus donor’s adjusted basis) is added to your basis. Use the formula above to figure out how much to add.

Are there any exceptions or special rules?

There are special rules for property that has been depreciated, for gifts of stock, and for property received from nonresident aliens. If your situation is unusual, check IRS Publication 551 or talk to a tax professional.

Recent Developments and Policy Status

As of July 27, 2025, the IRS has not made any major changes to the rules for figuring the basis of gifted property. The most current guidance is found in IRS Publication 551, which is updated every year. The IRS also provides answers to common questions in its Gift Tax FAQs.

According to analysis by VisaVerge.com, the IRS continues to stress the importance of accurate recordkeeping and correct calculation of basis, especially when gift tax is involved. Mistakes can lead to unexpected tax bills or missed chances to claim losses.

Summary and Actionable Takeaways

• Always get the donor’s adjusted basis, FMV at the time of the gift, and any gift tax paid.
• Keep all supporting documents for as long as you own the property and for several years after you sell it.
• Use the correct basis rule depending on whether FMV is higher or lower than the donor’s adjusted basis.
• If gift tax was paid, use the formula to figure out how much to add to your basis.
• Check the latest IRS publications and consider professional advice for complex situations.

By following these steps and tips, you can make sure you use the correct basis for any property you receive as a gift. This will help you avoid problems with the IRS and make the most of your gift. For more information, visit the IRS official page on basis of assets.

If you have questions about your specific situation, especially if the property is valuable or the rules seem complicated, it’s a good idea to talk to a tax professional. They can help you make sure you meet all requirements and avoid costly mistakes.

Learn Today

Donor’s adjusted basis → The original purchase price plus changes like improvements or depreciation affecting property value for tax.
Fair market value (FMV) → The price a property would sell for on the open market at gifting time.
Gift tax → A tax paid on property gifts exceeding exclusion limits, usually paid by the donor.
Holding period → The length of time a person owns property, important for tax gain or loss calculations.
IRS Form 709 → The United States Gift Tax Return form documenting gift tax paid on property transfers.

This Article in a Nutshell

Understanding gifted property’s basis is vital for tax purposes. Knowing donor’s adjusted basis, FMV, and gift tax ensures accurate tax calculations and prevents financial mistakes in future property sales.
— By VisaVerge.com