Knowledge is Power: Why It May Be Unwise To Give Away An Asset That Has Substantially Appreciated in Value

The short reason is that when an asset is given away, rather than inherited at death, IRS uses two different valuations of the asset when calculating gift tax and capital gains tax.


Follow this example:  an elderly couple wants to transfer the title on the house they own to their son.  The house’s basis (net purchase price plus capital improvements) is $150,000.  The current market value of the house is $550,000.


Since $12,000 is the gift tax exempt amount per year per person, in the scenario above, the IRS will assess the elderly couple gift taxes on the amount of $376,000 ($550,000 - $150,000 - $12,000 * 2).  However, the son’s cost basis on the house will not be stepped-up to the current market value (as in case if he inherited the house after his parents past away).  So, when, eventually, he sells the house, he’ll have to pay capital gains on the amount of Market Price - $150,000 (the so-called carry-over basis).


Note:  the tax basis for property a person inherits is the fair market value at the date of the original owner’s death.


Source: Plan Your Estate by Denis Cliffort & Cora Jordan  (ISBN 1-4133-0406-0)

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