Question

How is the donee's basis calculated for the gift of appreciated property for a gift made before 1977? Assume the donor pays gift tax.

A) The donee's basis is equal to the donor's adjusted basis at the time of the gift.
B) The donee's basis is the fair market value of the property at the time of the gift.
C) The donee's basis is calculated as the donor's adjusted basis minus any gift tax paid by the donor.
D) The donee's basis is determined by the donee's original cost if it's higher than the donor's adjusted basis.

Answer 1

For a gift made before 1977 where the donor paid gift tax, the donee's basis is the donor's adjusted basis plus a portion of the gift tax attributable to the net appreciation in value. Without gift tax, the donee's basis matches the donor's adjusted basis.

Step-by-step explanation:

The donee's basis in the gift of appreciated property for a gift made before 1977 is affected by whether the donor paid gift tax on the transfer. If the donor paid gift tax, the donee's basis is generally the same as the donor's adjusted basis at the time of the gift, increased by a portion of the gift tax paid. Conversely, if the donor did not pay any gift tax, the donee's basis would be the same as the donor's adjusted basis. It's important to note that the basis could be the fair market value (FMV) of the property on the date of the gift if the FMV is less than the donor's adjusted basis at the time of the gift. Simplified, the donee's basis would be the donor's adjusted basis plus a portion of the gift tax paid that is attributable to the net appreciation in value of the gift at the time of the transfer.