Basis of property received as a gift

For property you acquire by gift after December 31, 1920, section 1015 starts with the basis the property would have in the donor's hands. The statute also refers to the last preceding owner who did not acquire the property by gift. Your starting point therefore follows the property's basis in those hands, subject to the special rule for determining a loss.

You do not automatically substitute the property's fair market value on the gift date for that basis. When you calculate a loss, section 1015 substitutes fair market value at transfer if it falls below the relevant owner's basis after section 1016 adjustments covering the period before your receipt. Gift tax paid can also affect your basis under a separate set of rules.

If you receive property whose fair market value is below the applicable owner's adjusted basis, section 1015 limits your basis for determining a loss. You use the property's fair market value at the time of the gift for that purpose. The comparison uses the owner's basis after adjustments under section 1016 for the period before the gift.

This exception applies specifically to your determination of a loss. It does not replace the general basis rule for every purpose. The statutory comparison also concerns value when you receive the gift. It does not use a value from another date to decide whether this particular loss basis exception applies.

Section 1015 addresses what happens if you do not know the facts needed to determine the donor's basis or the basis of the last preceding owner who did not acquire the property by gift. If possible, the Secretary must obtain those facts from the donor, that preceding owner, or another person who knows them.

If the Secretary finds it impossible to obtain those facts, a separate valuation rule applies. For purposes of determining your basis, the owner's basis becomes the property's fair market value as found by the Secretary at the date or approximate date that owner acquired it. The acquisition date follows the best information the Secretary can obtain.

Your lack of basis information therefore does not itself make gift date fair market value the replacement basis. The statutory fallback requires the Secretary to find that obtaining the necessary facts is impossible. It then looks to the relevant owner's acquisition date or approximate acquisition date.

If you acquire property by gift on or after September 2, 1958, section 1015(d)(1) provides an increase to the basis determined under subsection (a) for gift tax paid with respect to the gift. That increase cannot take your basis above the property's fair market value when given. For gifts made after December 31, 1976, a further limitation determines how much of the gift tax produces a basis increase.

For your gift made after December 31, 1976, the increase equals the gift tax paid with respect to the gift multiplied by the ratio of net appreciation to the amount of the gift. The increase cannot exceed the gift tax paid. Net appreciation means the amount by which the gift's fair market value exceeds the donor's adjusted basis immediately before the gift.

You therefore have two distinct limitations within these rules. The general rule for gifts acquired on or after September 2, 1958, caps the increased basis at gift date fair market value. For transfers after December 31, 1976, you calculate additional basis as applicable gift tax × (net appreciation ÷ gift amount), subject to the tax paid ceiling.

For your basis increase, section 1015(d)(2) allocates gift tax to a particular gift. It starts with the gift tax paid under chapter 12 for all gifts the donor made during the relevant calendar year or preceding calendar period. It multiplies that tax by the ratio of the particular gift's amount to the donor's taxable gifts for that year or period.

You use taxable gifts as defined in section 2503(a), computed without the deduction allowed by section 2521. For the particular gift's amount, you start with the amount included in total gifts for section 2503(a). You then reduce that amount by any deduction allowed for that gift under section 2522 for charitable gifts or section 2523 for marital gifts.

If you receive a gift that the donor and the donor's spouse elected under section 2513 to treat as made one half by each, the gift tax calculation includes both halves. The tax paid with respect to your gift is the sum of the tax amounts attributable to each half. Each half uses the allocation rules in section 1015(d)(2).

If you acquired property by gift before September 2, 1958, a separate rule applies if you had not sold, exchanged, or otherwise disposed of it before that date. Your basis increases on September 2, 1958, by gift tax paid with respect to the gift, subject to a specific limit.

For this qualifying older transfer, you cap additional basis at fair market value on receipt minus the donor's tax basis then. This provision uses the difference at the time of the gift to limit the increase that occurs on September 2, 1958.

If you acquired the property by gift before 1955, references in section 1015(d) to provisions of the Internal Revenue Code mean the corresponding provisions of the Internal Revenue Code of 1939 or earlier revenue laws effective for the gift year. For purposes of section 1016(b), your basis increase under section 1015(d)(1) is treated as an adjustment under section 1016(a).

If you give away your interest in a passive activity, you cannot deduct the unused passive activity losses allocable to that interest in any tax year. Instead, you must increase the basis of the transferred interest by the amount of those losses.

This rule concerns you as the person giving away the interest. The losses allocable to the interest become an increase to its basis instead of a deduction for you. The restriction is not limited to the year of the gift. The rule says you cannot deduct those losses in any tax year.

Section 1014(e) applies to a specific situation involving property you gave away that later returns to you or your spouse. The person who received the gift must die after December 31, 1981. That person must have acquired the appreciated property by gift during the 1 year period ending on the date of death.

For this rule, property you give is appreciated property if its fair market value on the day of the gift exceeds its adjusted basis. If you are the donor or the donor's spouse and acquire that property from the deceased person, or it passes to you from that person, your basis is the deceased person's adjusted basis immediately before death.

A similar rule can apply if you are entitled to sale proceeds instead of receiving the property itself. It applies when the deceased person's estate, or a trust of which that person was the grantor, sells appreciated property meeting the gift timing condition. Similar basis rules apply to the extent you, as the donor or the donor's spouse, are entitled to the proceeds.