Generally, you do not include property that you received as a gift in your income for federal income tax purposes. However, if the property you received generates income such as rents, income, or dividends, that income (not the underlying property itself) is taxable to you.
Another tax issue arises when you sell the gifted property. To determine whether any of the proceeds of the sale is taxable or whether you are entitled to take a loss deduction, you have to figure out your basis in the property you acquired as a gift. First, you must know the adjusted basis of the property in hands of the donor just before it was given to you. You must also find out its fair market value at the time it was given to you.
Fair Market Value is Less Than Donor's Adjusted Basis
If the fair market value of the property at the time of the gift is less than the donor's basis, your basis depends on whether you have a gain or a loss when you sell the property. To calculate whether you have a gain, you compare the donor's basis (plus or minus any adjustments while you held the property) with the proceeds of the sale. To calculate whether you have a loss, you compare the fair market value of the property when you received it (again, plus or minus any adjustments while you held the property) with the proceeds of the sale.
This sounds complicated, but it is really easy to understand if we use numbers rather than words. Assume that you received some stock as a gift. At the time of the gift, the stock had a fair market value of $6,000, but the donor's adjusted basis in the stock was $8,000 (fair market value is less than donor's adjusted basis). You later sell the stock for $10,000, and the question is whether you have a gain or a loss, and how much. By comparing the donor's adjusted basis of $8,000 to the proceeds of the sale, you have a gain of $2,000. If you sold the stock for $5,000 rather than for $10,000, you have a loss of $1,000 by comparing the fair market value at the time of the gift ($6,000) to the proceeds of the sale.
If you use the donor's adjusted basis for figuring a gain and you get a loss, and then you use the fair market value for figuring a loss and you get a gain, you have neither a gain nor a loss for income tax purposes.
Fair Market Value is More Than Donor's Adjusted Basis
The calculation is easier if the fair market value is equal to or greater than the donor's adjusted basis at the time of the gift. Your basis is the same as the donor's basis, increased by part or all of any gift tax paid (depending on the date of the gift) and any adjustments to property during the time it was in your hands. A comparison of your basis in the property with the proceeds of the sale will give you either a gain or loss on the disposition of the property.
As with inherited property, any gain on the sale of property you received as gift is taxable income. If there is a loss on the sale and the property is investment property such as stocks, bonds, gems, jewelry, coin or stamp collections, or precious metals, you might be limited as to the amount of deductible loss. However, if you received personal use property such as household furnishings, a personal residence, or an automobile as a gift and later sold it, you cannot deduct any loss arising from their sale.
Copyright 2010 LexisNexis, a division of Reed Elsevier Inc.
