Are you receiving a gift of an asset from a family member or friend? If so, it’s important to understand how the basis of that asset is determined for future sales or dispositions.
At Creative Advising, our certified public accountants, tax strategists, and professional bookkeepers have the expertise to help you navigate the complexities of determining the basis of a gift asset. In this article, we’ll provide a comprehensive overview of how to determine the basis of an asset that you receive as a gift.
We’ll start by discussing the concept of basis in general, and then explain the different rules that apply depending on the type of asset you receive. We’ll also provide tips on how to keep accurate records of your asset’s basis that will help you in the future.
By the end of this article, you’ll have a better understanding of how to determine the basis of a gift asset and how to apply the appropriate rules when filing your taxes.
Tax Implications of Gifting an Asset
When gifting an asset, there may be certain tax implications both for the giver and the receiver. For the giver, they should determine if they are responsible for any gift tax that may be due on the amount they are gifting. The amount of the gift is determined by the fair market value of the asset, if the gift recipient does not pay it. For the receiver, the asset gifted to them has the same basis that it had for the giver. This basis will be used when they go to sell or dispose of the asset for capital gain or loss purposes.
One important factor to consider is that different types of assets may be subject to different rules and tax consequences. For example, the IRS defines certain types of real property, such as land, to have a higher value than other types of assets, such as stocks. This can have a direct effect on the amount of tax that may be due on the gift.
When gifting an asset, it’s important to understand the basis of that asset for future sales or dispositions. Knowing the basis of an asset is the key to determining the future capital gain or loss when the asset is sold. It’s also important to understand any local or state tax consequences that may apply.
Understanding the tax implications of gifting an asset is essential to ensure that both parties are appropriately taking the proper steps and adhering to the necessary rules. A qualified accountant or tax specialist can provide advice on the best way to structure the gift to ensure the most beneficial tax outcomes.
Determining the Fair Market Value of Gifted Assets
The fair market value of a gifted asset is the amount the asset would be worth if it were sold in the open market. When calculating the basis of a gifted asset for future sales or dispositions, the IRS considers the value of the asset at the time it was gifted. This can be a complex question as the value of an asset can change depending on the date transferred and the timing of when it is sold or disposed. Therefore, taxpayers who receive a gift of an asset should use caution to ensure they have the most current and accurate recordkeeping records to determine the basis of the asset for future sales or dispositions.
At Creative Advising, we suggest that individuals who receive a gift of an asset speak with an experienced tax professional to identify the appropriate valuation method to use for determining the fair market value of the asset. A professional can provide guidance on whether an appraisal is necessary, if the taxpayer needs to use a currency-based market value, or if other methods such as the income approach or the cost-basis approach need to be used. Additionally, the basis of an asset must be adjusted for any gift tax which may have been paid. Without taking into account all of these factors, it is possible that a taxpayer may underestimate or overestimate the basis of an asset for future sales or dispositions.
At Creative Advising we understand that, while it may seem complicated, the proper identification of the fair market value of a gifted asset is important for future sales or dispositions. We are here to help taxpayers understand the rules and regulations regarding gifted assets so they can make informed and thoughtful decisions as they file their taxes.
Record Keeping Requirements for Gifted Assets
When someone receives a gift of an asset, both the donor and the recipient should maintain a record of the transaction. This record needs to include detailed information such as the donor’s name, address, date of the gift, description and cost of the asset, and other pertinent details. It is also important to maintain a record of the asset’s basis when the recipient acquired it from the donor.
As the tax experts at Creative Advising know, the recipient’s basis in the gifted asset is generally the same as the donor’s basis. However, if the donor claims a deduction for gift taxes or any other related taxes, the recipient’s basis in the asset may be decreased by the amount of the deduction. This makes it essential for both parties to maintain detailed records of the transaction, so the basis of the asset can be accurately determined for future sales or dispositions.
When it comes to record keeping related to gifting an asset, it is always important to be mindful of applicable tax laws and regulations. Records need to be organized and easily accessible in case of an audit. To ensure you’re in compliance, it’s usually best to consult with a tax advisor, such as Creative Advising. Our team of certified tax strategists and professional bookkeepers are here to provide the best advice for your situation. We can help you create an organized system for storing and tracking gifted assets, so the basis of the asset is always accurately determined.
Gift Tax Exclusion Amounts
Under current tax laws, taxpayers are allowed certain gift tax exclusions when they give away property or assets to someone. Generally, an individual may gift up to $15,000 per recipient in a calendar year before they become subject to the federal gift tax. This tax was implemented in order to discourage taxpayers from avoiding estate taxes by giving away their assets or property prior to passing away.
The annual gift tax exclusion amount is indexed to inflation and it is subject to change each year. It’s important for both the giver and the recipient to ensure that the gift tax exclusion amount is taken into consideration, otherwise they may any taxes owed on gifts over the exclusion amount. Additionally, married couples can double the annual gift tax exclusion amount by combining the separate exclusions from each spouse.
It’s important to note that while there is an annual gift tax exclusion amount, lifetime exclusion amount that an individual can give away without owing any gift taxes is much larger. Currently, that limit is $11.18 million for an individual, and twice that amount for married couples.
When it comes to determining the basis of a gifted asset for future sales or dispositions, the basis is the same as it would be if the asset had been sold or disposed of by the original owner. This means that the recipient of the asset is not given a stepped-up basis in the property. This is important to consider, as it may affect the eventual capital gains tax owed on the sale or disposition of the asset.
Treatment of Gifted Assets in Estate Planning
Estate planning is a critical part of financial planning. It ensures that assets are distributed in accordance with the wishes of the individual, and the most tax-efficient way possible. As such, the gifting of assets and the treatment of the gifted assets in estate planning are of utmost importance. The basis of the asset that has been gifted for future sales or dispositions is determined based on the donor’s basis. If the donor did not acquire the asset in a taxable transaction, the donor’s basis is equal to the asset’s fair market value at the time of the gift. The donee will then receive a carryover basis, which is equal to the donor’s basis. Determining the basis of a gifted asset is essential, as it will determine how much capital gains tax will need to be paid upon sale of the asset in the future.
It is important that careful consideration is taken when gifting an asset in terms of estate planning. Due to the complexities of tax laws, it is important to seek the advice of a qualified tax professional to ensure that the gifting of assets is done in the most tax-efficient way possible.
Tom Wheelwright is a CPA, tax strategist and professional bookkeeper who works with clients to answer any questions related to the tax implications of gifting an asset. Tom is well-versed in determining the basis of a gifted asset for future sales or dispositions, and the most tax-efficient ways to gift assets for estate planning. He ensures that his clients are informed of the various regulations and obligations associated with gifting an asset, as well as the best ways to maximize the tax benefits associated with such a gift. Tom can provide advice, guidance and assistance so that his clients can make the best decision for their financial goals and future estate planning.
“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
Furthermore, due to the dynamic nature of tax-related topics, the information presented in this article may not reflect the most current tax laws, rulings, or interpretations. It is always recommended to verify any tax-related information with official government sources or seek advice from a qualified tax professional before making any decisions or taking action.
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Please consult with a qualified tax professional or relevant authorities for specific advice tailored to your individual circumstances and to ensure compliance with the most current tax laws and regulations in your jurisdiction.”
