I Sold Something I Received As A Gift

If you sell something that you received as a gift, your tax basis (for determination of gain or loss) is considered to be the same as the grantor's (the person who gave you the gift). Where possible, you should ask the grantor for documentation to establish that basis, should you ever need to prove it in an audit situation. The grantor is required by law to provide this information to you.

However the basis is different if the value of the gift is less than the grantor's basis at the time of the gift. In that case, you will have two different tax bases; one for computing gain, and one for computing loss. The basis for the purpose of computing the gain will be the grantor's basis, as stated above. However your basis for determining if you have a loss will be the value at the time of the gift. For this reason, it is very possible that a subsequent sale will result in no gain or loss (if the sales price is greater than the value at the time of the gift, but less than the grantor's basis).

If the grantor paid a gift tax in connection with his transferring the property to you, a portion of tax may be added to his original cost basis and thus increase the tax basis you use for subsequent sales. The amount of the gift tax that would be added to the basis is computed by taking a ratio of the excess of the value of the time of the gift over the grantor's basis to the total value of the gift, and multiplying that fraction by the gift tax paid.

For example: A grantor makes a gift to you of an asset worth $10,000 that he bought for (his basis is) $7,000 (assuming the annual exlusion has been applied to other gifts). He pays a gift tax of $4,000 on the gift. Your basis will be $8,200 computed by dividing the $3,000 appreciation by the $10,000 gift (30%), multiplying it by the gift tax (30% of $4,000 = $1,200) and adding that figure to the grantor's original basis of $7,000.

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