You may be trying to get your brain around how to figure out basis of property that you receive as a gift. Here’s what you have to consider:
- The adjusted cost basis to the donor just before he or she made the gift to you.
- The fair market value (FMV) at the time you were gifted.
- The amount of any gift tax paid.
If the property’s FMV when you’re gifted is less than the donor’s adjusted basis, then your adjusted basis depends on whether you have a gain or a loss when you dispose of the property.
- Your basis for figuring a gain is the same as the donor’s adjusted basis, plus or minus any required adjustments to basis while you held the property.
- Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property.
If you use the donor’s adjusted basis for figuring a gain and get a loss, and then you use the FMV for figuring a loss and get a gain, you have neither a gain nor a loss on the sale or disposition of the property.
If the FMV is equal to or greater than the donor’s adjusted basis, your basis is the donor’s adjusted basis at the time you received the gift. If you received a gift after 1976, increase your basis by the part of the gift tax paid on it that is due to the net increase in value of the gift..
Another burning question that may be bothering you: If I sell my home and use the money to pay off the mortgage, do I have to pay taxes on that money?
The proceeds from selling your home used to pay off the mortgage aren’t a factor in figuring out the taxable amount for the sale. It’s the amount you realize on your home’s sale and the adjusted basis of your home that are important.
You have a capital gain if the amount you realize is otherwise paid off as part of the sale less your selling expenses, and that is more than your adjusted basis in your home. Your adjusted basis generally is your cost in acquiring the home plus any capital improvements you made minus casualty loss amounts and other decreases. If you financed buying the house with a mortgage, include that in determining your adjusted costs basis in the residence.
And here’s the good news: You may be able to exclude from income all or a portion of the gain on your home sale. If you can exclude all of the gain, you don’t need to report the sale on your tax return in most cases.
The basic rule is that if you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.
Let us know if you have questions about the details of these rules.