Receiving a gift or a bequest or other inheritance carries with it a unique set of federal income, gift and estate tax rules that must be observed. Knowing what the rules are will help you prepare for any tax consequences that may ensue upon the ultimate sale or other disposition of the property.
The recipient of a gift or a bequest pays no gift or estate tax. Those taxes, if they are due, are payable by the donor (the person making the gift) or the estate in the case of a decedent. Generally, no gift tax is due for gifts to any one person that do not exceed $15,000 for 2019 ($30,000 if the gift is given jointly by a husband and wife). Gift tax payable over those amounts can also be avoided by the donor using the unified estate and gift tax lifetime exclusion of $10 million, adjusted for inflation annually.
Gifts to noncitizen spouses and foreign gifts. The first $155,000 of gifts in 2019 to a spouse who is not a U.S. citizen is not included in taxable gifts. A U.S. person receiving aggregate foreign gifts in excess of $16,388 in 2019 must file an information return.
Basis. The basis of property received by gift or bequest is used by the recipient to determine whether there is gain or loss on a subsequent sale or other disposition of the property. These rules can be complex.
Gifts. If property has been acquired by gift, the basis to the donee (the recipient) for income tax purposes is the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift (carryover basis). However, the basis for loss is the lower of the carryover basis or the fair market value of the property at the time of the gift. In some cases, there is neither gain nor loss on the sale of property received by gift because the selling price is less than the basis for gain and more than the basis for loss.
In the case of a gift on which gift tax is paid, the basis of the property is increased by the amount of gift tax attributable to the net appreciation in value of the gift. The net appreciation for this purpose is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.
Bequests or through intestacy. Property received from a decedent under a will or by operation of law generally enjoys a “stepped-up” basis set at the property’s fair market value at date of death (or several months thereafter at the election of the executor). Most recipients of property from an estate find the stepped-up basis advantageous since it lowers the potential amount of capital gain tax due upon the sale of the asset. Depending upon the age of the donor, the advantage of stepped-up basis, therefore, can figure significantly into planning whether to give gifts during a lifetime or wait to pass property through your estate.