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.