Carryover Basis
Carryover basis means the recipient of a gift takes the donor's original cost basis, with adjustments for gift tax paid. Used for lifetime gifts (NOT inheritance, which gets stepped-up basis).
Exam Tip
Gifts = CARRYOVER basis. Inheritance = STEPPED-UP basis. Split basis when FMV < donor basis at gift.
What is Carryover Basis?
Carryover basis applies to GIFTS. The recipient takes the donor's original cost basis.
Gift Basis Rules
| Situation | Basis Rule |
|---|---|
| FMV > Donor's Basis at gift | Use donor's basis (carryover) |
| FMV < Donor's Basis at gift | Split basis rule applies |
Split Basis Rule
If FMV at gift is LESS than donor's basis:
- For GAIN: Use donor's basis
- For LOSS: Use FMV at date of gift
- If sold between: No gain or loss
Gift vs. Inheritance
| Transfer Type | Basis Rule |
|---|---|
| Gift (lifetime) | Carryover basis |
| Inheritance (death) | Stepped-up basis |
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Related Terms
Step-Up in Basis
Step-up in basis is a tax provision that adjusts the cost basis of inherited assets to their fair market value (FMV) at the date of the decedent's death, effectively eliminating unrealized capital gains that accumulated during the decedent's lifetime. This allows heirs to sell inherited assets with little or no capital gains tax.
Gift Tax
Gift tax is a federal tax on transferring assets to another person while alive, with an annual exclusion of $18,000 per recipient in 2024 ($36,000 for married couples splitting gifts). The lifetime exemption of $13.61 million is unified with the estate tax exemption.
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