IRC 1019: Basis of Property Acquired as a Gift
Discover how IRC 1019 modifies the basis of gifted property. This rule provides a specific adjustment for the gift tax paid on the asset's appreciation.
Internal Revenue Code Section 1015 provides the rules for determining the tax basis of property received as a gift. This basis is the figure used to calculate gain or loss on a future sale of the asset. The rule begins with the donor’s basis, but adjustments related to gift taxes paid can alter the final amount.
Determining the Basis of Gifted Property
When property is received as a gift, the recipient takes the donor’s adjusted basis at the time of the gift, which is known as a “carryover basis.” A dual-basis rule applies if the fair market value (FMV) was less than the donor’s adjusted basis when the gift was made. For calculating a future gain, the recipient must use the donor’s higher adjusted basis. For calculating a future loss, the recipient must use the property’s lower FMV at the time of the gift. If the property is eventually sold for a price that falls between the donor’s adjusted basis and the FMV at the time of the gift, the recipient recognizes no gain or loss.
Increasing Basis for Gift Tax Paid
The recipient’s basis can be increased by the portion of federal gift tax paid that is attributable to the net appreciation, which is the amount the gift’s FMV exceeds the donor’s adjusted basis at the time of the gift. This adjustment is not available if the property’s FMV was less than the donor’s basis when the gift was made.
The calculation for the basis increase follows the formula: Gift Tax Paid × [(Fair Market Value at time of gift – Donor’s Adjusted Basis) / Amount of the Taxable Gift]. The “amount of the taxable gift” is the FMV less the annual gift tax exclusion, which for 2025 is $19,000 per recipient. The gift tax is reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
For example, a donor gives property with an adjusted basis of $50,000 and an FMV of $150,000, and pays $20,000 in federal gift tax. Assuming the taxable gift amount after the exclusion is $131,000, the basis increase is $20,000 × ($100,000 / $131,000), which equals approximately $15,267. The recipient’s new basis would be $65,267 ($50,000 carryover basis + $15,267 tax adjustment). The property’s basis, after the increase for gift tax paid, cannot exceed the property’s FMV at the time the gift was made.