What is the implication if I sell property that has been gifted to me?
Somehow many taxpayers have the false notion that selling gifted property would preclude them from paying capital gains tax due to the fact that they think incorrectly, that they can enjoy the favorable provision of STEPPED UP BASIS as in the case of the Inherited Property.
However, the IRS Tax Code states that "in the case of a gifted property, there is no provision to allow for a stepped-up basis" in the calculation of capital gains".
For determining the capital gain in the case of gifted property, the Tax Code states that "the basis is the same as it would have been in the hands of the donor and is called a carryover" basis." This is the main distinction when considering the calculation of for the gain of inherited property for which the IRS allows a Stepped Up Basis". Hence, the sale of gifted property would be subject to a higher capital gains and thus result in considerable more capital gains tax.
To illustrate an example, suppose an individual who had acquired 100 shares of IBM stock for $1,000 chooses to give them to the recipient as a gift, the recipient takes the same $1,000 basis as the donor. Therefore, if the recipient sells the shares when they reach $1 million in value, the recipients capital gains tax liability generally would be based on the capital gain of $999,000.