Before you sell property that you received as a gift, ask yourself the following questions:
- Does the property provide a good yield?
- How does this property fit into my investment portfolio?
- What are the short and long-term market outlooks for this property?
- Do I need the money?
- Has the property appreciated in value?
- What are the tax consequences of selling the property?
- Do I have loss carryovers or unrealized losses in my portfolio I can sell to offset the gain?
- If I wait to sell, will I be in a higher or lower tax bracket?
If you sell the property, you will need to know your basis to determine your gain or loss. There are special basis rules for property received as a gift.
General rule. Your basis and holding period equal the giver’s. This is referred to as “carryover” basis because the giver’s basis carries over to the recipient along with the gift.
Special rules for loss property (i.e. property which has gone down in value in the hands of the giver). At the time of the gift, the giver’s basis (cost) will be higher than the value of the property. In this case, the recipient must keep track of two figures for basis purposes.
- To calculate gain on a later sale, the general carryover basis rule applies, and your basis is the same as the giver’s.
- To calculate loss on a later sale, your basis is limited to the (lower) value of the property at the time of the gift, thereby limiting the loss.
- If loss property is sold for an amount in between the property’s date of gift basis and (lower) value, there will be no gain or loss on the sale.
If gift tax was paid, the basis is increased by that portion of the gift tax paid which is allocable to the increase in value at the date of gift.
The giver can give you a gift letter, records or a copy of the gift tax return (Form 709), if one was filed, with the basis. If you can’t establish basis, the IRS can impose a zero basis, in which case the gain is the sales price.
Taxes may cause you to receive less than what you would have if you had received cash instead. But don’t be a Grinch; be thankful for the gift.