What is the tax basis on the sale of gifted property?

UPDATED: Jul 18, 2023Fact Checked

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Jeffrey Johnson

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 18, 2023

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UPDATED: Jul 18, 2023Fact Checked

Understanding what your basis is in property that was gifted to you is important as it will determine the amount of tax due. The gift tax is calculated based on the fair market value of the property at the time of transfer. Typically, gift recipients are not liable to pay taxes, but if they later decide to sell the property they received as a gift, there are tax consequences because the recipient receives the donor’s tax basis in the property. The basis of gifted property is the amount the donor paid for the property, which is transferred to the donee. If any gift tax is paid on the gift, then the basis would increase by the amount of the gift tax.

Only gifts valued above a certain amount are required to be reported. Each year, the IRS adjusts this exclusion limit for gifts. For 2015-2017, the exclusion amount was stuck at $14,000; for 2018, the annual exclusion was increased to $15,000. This means that any gift valued at $15,000 or under is entirely exempt from taxation.

Examples

Example 1. Susan gifts her daughter Becky an heirloom necklace that cost $5,000.00 in 1945.  Its fair market value today is $10,000.00.  Becky’s basis in the gift is $5,000.00 since that was Susan’s original basis.  However, if the necklace had a fair market value of only $4,000.00 today because the cost of gold was down, then the basis would be $4,000.00 as the fair market value was less than the original purchase price of the necklace.

Example 2. David decides to retire and to gift his business to his son Mark.  David has owned the business for 40 years and his total basis in the business is $130,000.00.  The fair market value of the business is $200,000.00.  Mark’s new basis in the business is $130,000.

Example 3. Sam decides to retire and gift his business in 2016 to his daughter Mary.  Sam’s basis in the business is $1,500,000.00.  The business has a fair market value of $3,000,000.00.  Because the gift exceeds Sam’s lifetime exclusion for gifting the gift tax must be paid by Sam on $500,000.00.  Sam pays gift tax of $225,000.00.  Therefore Mary’s new basis becomes Sam’s basis plus the amount of the gift tax, for a total of $1,725,000.00 as that total is still less than fair market value. Assume Mary decides to sell the property. The fair market value at the time the gift was completed was $700,000 and the property sold for $1 million, but the father originally purchased the apartment complex for $500,000. Under federal law, the daughter’s taxable basis in the property would be $500,000 and she would be taxed on her gain of $500,000 (difference between the basis and sale price).

Case Studies: Insurance Implications of Gifted Property and Tax Basis

Case Study 1: Homeowner’s Insurance, SecureHome Insurance

SecureHome Insurance provided homeowner’s insurance coverage to individuals who received gifted property and later decided to sell it. Homeowner’s insurance protects the property owner from financial loss due to damages or loss caused by covered perils. In the case of gifted property, the recipient assumes the donor’s tax basis in the property.

If the recipient decides to sell the property, any potential damages or losses that occur during the selling process would be covered by homeowner’s insurance from SecureHome Insurance. This coverage ensures that the recipient is protected from unexpected financial liabilities and can navigate the selling process with peace of mind.

Case Study 2: Liability Insurance, ProtectShield Insurance

ProtectShield Insurance offered liability insurance coverage to individuals who received gifted property and became liable for any injuries or damages that occurred on the property. Liability insurance protects the property owner from potential legal claims and financial losses arising from accidents or injuries that occur on the property.

If the recipient of gifted property is held liable for any such incidents, liability insurance from ProtectShield Insurance would cover the costs associated with legal defense and potential settlements or judgments. This coverage provides essential protection for the property recipient and safeguards their financial well-being in case of unexpected liability issues.

Case Study 3: Title Insurance, SecureTitle Insurance

SecureTitle Insurance provided title insurance coverage to individuals who received gifted property and later decided to sell it. Title insurance protects against financial losses and legal claims arising from defects or issues with the property’s title. When selling gifted property, title insurance ensures that the recipient has clear and marketable title, free from any potential ownership disputes or encumbrances.

This coverage from SecureTitle Insurance protects the recipient from unexpected claims that may arise during the sale process and ensures a smooth transfer of ownership. By mitigating the risks associated with title defects, title insurance provides peace of mind to the property recipient and facilitates a successful property sale.

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Jeffrey Johnson

Insurance Lawyer

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Insurance Lawyer

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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