11.2 Gift Basis under §1015

11.2 Gift Basis under §1015

REG Area III, Group A also asks you to calculate the tax basis of property received as a gift. Lifetime gifts use IRC §1015, not the date-of-death FMV rule in §1014. Mixing the two is the most expensive property-basis error on REG. Gifted property is still the donor’s economic position, transferred without a sale. The Code therefore starts the donee where the donor stopped — with one important loss-limitation overlay.

Carryover basis — the general rule

If the donor’s adjusted basis is less than or equal to FMV at the date of the gift, the donee takes the donor’s adjusted basis. That is carryover basis. Later capital improvements by the donee increase it. Later depreciation, amortization, and similar adjustments by the donee decrease it. The donor’s holding period tacks under IRC §1223(2) because the donee has, in whole or in part, the same basis the donor had.

Worked carryover. Donor’s adjusted basis $40,000. FMV at gift $70,000. Donee sells for $75,000. Gain is $35,000 using the $40,000 carryover. It is not $5,000 of post-gift appreciation only. The donor’s unrealized gain travels with the property.

Gift tax paid on net appreciation

If the donor actually paid federal gift tax on the transfer, IRC §1015(d) increases the donee’s basis — but not above FMV at the date of the gift — by the gift tax attributable to net appreciation. Net appreciation is FMV minus the donor’s adjusted basis immediately before the gift. The increase is:

Gift tax paid × (net appreciation / amount of the gift)

The “amount of the gift” is the chapter 12 value of the transferred property. The annual exclusion and the lifetime exemption are inflation-indexed. AICPA’s REG assumption is that you will not be tested on specific indexed dollar amounts, so do not memorize this year’s annual exclusion as a REG number. What REG will test is the structure:

• Only gift tax paid increases basis. A gift that is fully sheltered so that no tax is paid produces no increase.
• Only the slice of that tax that belongs to net appreciation is added. You do not add the entire gift tax.
• The add-on cannot push basis above FMV at the gift date.
• If FMV is below the donor’s basis, net appreciation is zero (or negative). The fraction’s numerator is zero. Gift tax, even if paid, adds nothing.

Worked gift-tax add-on. Donor’s basis $40,000. FMV $100,000. Gift tax actually paid $12,000. Net appreciation is $60,000. Using $100,000 as the amount of the gift, the increase is $12,000 × ($60,000 / $100,000) = $7,200. Donee’s gain basis is $47,200, still under FMV. If instead the donor paid no gift tax because remaining exemption covered the transfer, the donee’s basis stays $40,000.

Dual basis when FMV is below the donor’s basis

When FMV at the gift is less than the donor’s adjusted basis, §1015 will not let the donee take a loss the donor never recognized. Two bases exist:

• Gain basis = donor’s adjusted basis (plus any gift-tax add-on, which here is zero because there is no net appreciation)
• Loss basis = FMV at the date of the gift

If the donee later sells between those two figures, there is no gain and no loss. The selling price is below the gain basis, so there is no gain, and above the loss basis, so there is no loss. That band is the dual-basis rule working as designed, not a computational error.

Worked dual basis — memorize this pattern. Donor’s adjusted basis $40,000. FMV at the gift $25,000.

A $30,000 sale is the trap. Candidates who pick one basis and run with it will invent a $10,000 gain (using FMV) or a $10,000 loss (using $40,000). Both are wrong. The sale sits in the band.

The same facts sold at $45,000 are a $5,000 gain using the donor’s $40,000, not a $20,000 gain using FMV. Sold at $20,000, the loss is $5,000 using FMV of $25,000, not a $20,000 loss using the donor’s basis. Dual basis is a one-way street against imported built-in losses.

Holding period — teach the split, then stop

IRC §1223(2) tacks the donor’s holding period only when the property has, for purposes of determining gain or loss, the same basis in whole or in part in the donee’s hands as in the donor’s hands.

• Gain (donee uses the donor’s adjusted basis): tacking applies. The donee’s holding period includes the donor’s. A donor who held for four years can gift on Monday and the donee can sell on Friday at a gain that is long-term.
• Loss when dual-basis FMV is used: the donee is not using the donor’s basis. Tacking does not apply. The holding period typically starts at the gift — more precisely, it begins the day after the date of the gift. A sale a week later at a dual-basis loss is short-term unless the donee has independently held for more than one year after the gift.
• Sale in the no-gain/no-loss band: there is no recognized gain or loss, so character and holding period do not matter for that closing.

Do not import the inherited-property rule. Inherited property with a §1014 basis is automatically long-term even if sold the next day. Gifted property is not. Contrast the two in /study-guides/cpa-reg/asset-basis/inherited-basis and in the capital-gain classification tasks in /study-guides/cpa-reg/gross-income/capital-gains.

Exam traps that are still in Blueprint III.A

Carryover is the default only when FMV is at least as high as the donor’s basis. Dual basis is not optional: you do not get to pick whichever basis produces the nicer answer. Gift-tax basis increase is a gain-side, appreciation-only adjustment capped at FMV; it is not a second cost. Indexed annual-exclusion dollars are not the tested fact — whether gift tax was paid, and whether net appreciation existed, is the tested fact.

Wash-sale basis adjustments on stock are a different §1091 rule, taught in /study-guides/cpa-reg/special-basis/wash-sale-basis. Do not apply §1015 dual basis to a wash sale of marketable securities the taxpayer bought and sold in the taxpayer’s own account.

/practice/cpa-regPractice questions with detailed explanations