Gifted assets

What Are Gifted Assets?

Gifted assets are any type of property, money, or other valuable items transferred by one individual (the donor) to another (the donee) without receiving full or adequate consideration in return. This financial transaction falls under the broader category of estate planning and is subject to specific tax rules in many jurisdictions. Unlike an inheritance, which is received after someone's death, gifted assets are transferred during the donor's lifetime. Understanding the implications of gifted assets is crucial for both donors seeking to manage their taxable estate and donees who may face considerations regarding their adjusted basis for future sale.

History and Origin

The concept of taxing transfers of wealth has a long history, evolving to prevent individuals from avoiding estate taxes by simply giving away their wealth before death. In the United States, a federal gift tax was first enacted in 1924, then repealed in 1926, and later reintroduced and permanently established in 1932.⁴¹,⁴⁰ The initial intent of the gift tax was primarily as a protective measure to minimize avoidance of estate and income taxes, rather than for its direct revenue generation.³⁹,

Over time, the structure of the gift tax has undergone several revisions. For instance, in 1976, Congress unified the gift and estate tax regimes, establishing a single unified credit that applied to both lifetime gifts and transfers at death.,³⁸ This unification aimed to further limit the ability to circumvent estate taxes through lifetime giving. Subsequent acts, such as the Economic Growth and Tax Relief Reconciliation Act of 2001, temporarily phased out the estate tax while largely retaining the gift tax, underscoring its role in the broader tax code.³⁷,³⁶

Key Takeaways

• Gifted assets are transfers of wealth made during a donor's lifetime without full compensation.
• The basis of gifted assets for the donee depends on the property's fair market value (FMV) at the time of the gift and the donor's original adjusted basis.
• The IRS provides an annual gift tax exclusion, allowing individuals to gift a certain amount per recipient each year without tax implications or reporting requirements.
• Beyond the annual exclusion, a lifetime exemption amount allows for larger gifts without immediate gift tax, instead reducing the available estate tax exemption.
• Gifted assets can be a strategic tool in estate planning to reduce the size of a future taxable estate.

Formula and Calculation

When property is received as a gift, determining its basis for the donee involves a specific calculation that can vary depending on the property's fair market value (FMV) at the time of the gift compared to the donor's adjusted basis. The basis is crucial for calculating future capital gains or capital loss if the donee later sells the asset.

The Internal Revenue Service (IRS) outlines two primary scenarios for determining the basis of gifted assets:

1. If the FMV at the time of the gift is equal to or greater than the donor's adjusted basis:
   The donee's basis is generally the donor's adjusted basis just before the gift was made, adjusted for any gift tax paid on the net increase in value (if the gift was made after 1976).³⁵,³⁴

   $$\text{Donee's Basis} = \text{Donor's Adjusted Basis} + \text{Gift Tax Paid (if applicable)}$$

2. If the FMV at the time of the gift is less than the donor's adjusted basis:
   This scenario presents a "dual basis" rule. The donee will have two different bases depending on whether the property is later sold for a gain or a loss.³³,³²

   • For calculating gain: The basis is the donor's adjusted basis.
   • For calculating loss: The basis is the FMV of the property at the time of the gift.
   $$\text{Basis (for Gain)} = \text{Donor's Adjusted Basis}$$ $$\text{Basis (for Loss)} = \text{FMV at time of Gift}$$

   If the sale results in a price between these two bases, neither a gain nor a loss is recognized for tax purposes.³¹,³⁰

Interpreting Gifted Assets

Interpreting the implications of receiving gifted assets primarily revolves around understanding the tax basis and potential gift tax consequences. For the donee, the basis determination is paramount because it dictates the starting point for calculating any capital gain or loss upon a subsequent sale. A higher basis generally leads to a lower taxable gain or a larger deductible loss, while a lower basis can result in a higher taxable gain.

For the donor, the key interpretation involves navigating the annual exclusion and lifetime exemption rules. Gifts made within the annual exclusion limit do not reduce the donor's lifetime exemption and do not require a gift tax return. However, gifts exceeding this amount, while often not immediately taxable due to the lifetime exemption, still require the filing of IRS Form 709.²⁹,²⁸ Strategic gifting can reduce the size of one's taxable estate, potentially lowering future estate tax liabilities.

Hypothetical Example

Consider an individual, Sarah, who received 100 shares of XYZ Corp. stock as a gift from her father, John.

• John originally purchased the shares for $50 per share (his adjusted basis) years ago.
• At the time John gifted the shares to Sarah, the fair market value (FMV) of XYZ Corp. stock was $120 per share.
• The total value of the gift was $12,000 (100 shares x $120/share). Since the 2025 annual gift tax exclusion is $19,000 per recipient²⁷,²⁶, this gift falls within the exclusion, and John does not need to file a gift tax return, nor does it reduce his lifetime exemption.

Now, let's analyze Sarah's basis:
Since the FMV at the time of the gift ($120) was greater than John's adjusted basis ($50), Sarah's basis in the stock is generally John's adjusted basis. So, Sarah's basis is $50 per share, or $5,000 total.

Scenario 1: Sarah sells the shares for $150 per share.

• Sale proceeds: $15,000 (100 shares x $150)
• Sarah's basis: $5,000
• Capital gains: $10,000 ($15,000 - $5,000)

Scenario 2: What if the FMV at the time of the gift was $30 (less than John's basis of $50)?

• Sarah's basis for figuring a gain would be $50 per share (John's basis).
• Sarah's basis for figuring a loss would be $30 per share (FMV at gift).
  • If Sarah sells for $60 (a gain compared to FMV but still less than John's basis), her gain basis applies, and she'd calculate a gain from $50.
  • If Sarah sells for $20 (a loss compared to both), her loss basis applies, and she'd calculate a loss from $30. This is the dual basis rule in action, where the basis used depends on whether the sale results in a gain or a loss.

Practical Applications

Gifted assets play a significant role in various financial and estate planning strategies. For individuals with substantial wealth, strategic gifting can be a core component of reducing their potential taxable estate and minimizing future estate tax liabilities.²⁵,²⁴ By utilizing the annual exclusion over many years, donors can systematically transfer wealth to multiple recipients without incurring gift tax or dipping into their lifetime exemption.

Beyond tax considerations, gifting can serve philanthropic goals, provide financial support to family members (e.g., funding education or medical expenses directly, which are typically exempt from gift tax rules²³,²²), or help transfer family businesses or property to the next generation. For example, some individuals choose to make accelerated gifts to qualified tuition programs (529 plans) to maximize education savings for children or grandchildren.²¹,²⁰ The careful consideration of how appreciated assets or depreciated assets are gifted can also significantly impact the donee's future tax liabilities. Consulting with financial and tax professionals is often recommended to develop a comprehensive gifting strategy that aligns with an individual's financial goals and complies with IRS regulations.¹⁹,¹⁸

Limitations and Criticisms

While gifting can be a powerful tool for wealth transfer and estate planning, it comes with certain limitations and potential drawbacks. A primary concern is the complexity surrounding the determination of the donee's adjusted basis, especially when the fair market value of the gifted asset is less than the donor's original basis at the time of the gift. This "dual basis" rule can make future capital gains or capital loss calculations challenging for the recipient.¹⁷,¹⁶

Another limitation involves the irrevocability of many gifts. Once an asset is gifted, the donor typically relinquishes all control and rights to that asset. This loss of control can be a significant consideration, particularly for large or unique assets. Furthermore, if a donor makes a substantial gift that exceeds both the annual exclusion and the lifetime exemption, a federal gift tax liability may arise, which is generally the responsibility of the donor.¹⁵ While rare for most Americans due to the high lifetime exemption, it is a critical consideration for high-net-worth individuals. Additionally, some gifting strategies, such as those involving trusts, can introduce further legal and administrative complexities.¹⁴ The need for accurate valuation of non-cash gifted assets is also a practical limitation, as incorrect valuations can lead to tax issues.

Gifted Assets vs. Inherited Assets

The primary distinction between gifted assets and inherited assets lies in the timing of the transfer and, crucially, how their tax basis is determined.

The difference in basis treatment means that gifting highly appreciated assets during one's lifetime can result in a larger future capital gains tax liability for the recipient compared to if those same assets were inherited. Conversely, inheriting assets with a step-up in basis can be highly advantageous for beneficiaries seeking to sell the property shortly after death.

FAQs

1. Do I have to pay taxes on gifted assets I receive?

Generally, no. The recipient of a gift (the donee) typically does not pay federal income tax on the value of the gifted assets received. The responsibility for any potential federal gift tax usually falls on the donor, not the recipient.¹³,

2. How much can someone gift without paying gift tax?

For 2025, an individual can gift up to $19,000 per recipient per year without incurring gift tax or having to file a gift tax return.¹²,¹¹ This is known as the annual exclusion. Married couples can combine their annual exclusions, effectively gifting double that amount to each recipient. Gifts for qualified tuition or medical expenses paid directly to the institution or provider are also excluded from gift tax, regardless of the amount.¹⁰,⁹

3. What happens if a gift exceeds the annual exclusion amount?

If a gift exceeds the annual exclusion for a given year, the donor must generally file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.⁸ However, this does not necessarily mean gift tax is owed immediately. The amount exceeding the annual exclusion is subtracted from the donor's lifetime gift tax lifetime exemption. For 2025, this combined lifetime exemption for gift and estate taxes is $13.99 million per individual.⁷,⁶ Gift tax is only paid if total taxable gifts over a lifetime exceed this substantial exemption amount.

4. How does receiving a gifted asset affect my taxes if I sell it later?

When you sell a gifted asset, your tax liability for capital gains or capital loss is determined by its adjusted basis. For gifted property, your basis is generally the same as the donor's adjusted basis.⁵,⁴ If the asset appreciated since the donor acquired it, you may owe capital gains tax on that appreciation when you sell it. If the asset had a lower fair market value than the donor's basis at the time of the gift, a special "dual basis" rule applies, impacting whether you recognize a gain or a loss.³

5. Can I gift property other than cash?

Yes, you can gift various types of property, including real estate, stocks, bonds, and other tangible or intangible assets. The value of the gifted property is assessed at its fair market value at the time of the gift to determine if it falls within the annual exclusion or impacts the lifetime exemption. Proper valuation and documentation are crucial when gifting non-cash assets.²,¹