Why This Matters — Especially in Estate and Gift Planning
As an estate planner, I often help families transfer wealth across generations — through gifts, trusts, or inheritances. But here’s what many people don’t realize:
Sometimes, giving away property that has lost value can create a confusing tax situation for the recipient — especially when they try to sell it.
One key reason? A little-known tax concept called the Dual Basis Rule (also known as the gain/loss rule for gifts).
If you’re planning to give, receive, or eventually sell a gifted asset, understanding this rule can help you avoid costly surprises — or worse, missed deductions.
The Basics: What Is Basis?
In tax terms, basis generally means your starting point for measuring gain or loss when you sell an asset. Normally, it’s what you paid for it.
But when someone gives you property — like stock, real estate, or collectibles — your basis comes from the donor, and that’s where things get interesting.
When the Dual Basis Rule Applies
The Dual Basis Rule only applies if, at the time of the gift:
🟡 The property’s fair market value (FMV) is less than the donor’s adjusted basis
This situation signals that the asset has declined in value — and now the IRS treats your basis as two different numbers, depending on what happens next.
🔍 What Happens When You Sell That Gifted Property?
When you later sell the gift, here’s how the rule breaks down:
|
If you sell it for… |
Which Basis Applies? |
Result |
|---|---|---|
|
More than the donor’s basis |
Use donor’s basis |
Report a capital gain |
|
Less than the FMV on gift date |
Use FMV at gift date |
Report a capital loss |
|
In between FMV and donor’s basis |
No gain, no loss |
Wash — nothing is reported |
Example: Gifted Stock with Declining Value
Suppose your aunt gives you stock:
-
She paid $40,000 for it (her basis)
-
At the time of the gift, it’s worth only $10,000
-
You later sell it for:
|
Sale Price |
Result |
|---|---|
|
$45,000 |
Use $40,000 basis → Gain $5,000 |
|
$9,000 |
Use $10,000 FMV → Loss $1,000 |
|
$20,000 |
Between $10K and $40K → No gain or loss |
This rule prevents manipulation:
You can’t claim a loss you didn’t personally suffer, and you can’t avoid tax on a gain that originated with someone else.
🧾 Can You Use the Loss to Offset Other Income?
If the asset is a capital asset (like stocks, bonds, or investment property):
Yes — a capital loss can:
-
Offset capital gains, and
-
Reduce up to $3,000 of ordinary income per year
Any unused loss? It carries forward to future tax years indefinitely.
But beware: If the asset is a personal-use item (e.g., furniture, a car), the IRS does not allow you to deduct the loss — even if the math works out.
Estate Planning Tip: Consider Holding vs. Gifting
Sometimes, it’s better to hold a depreciated asset until death instead of gifting it.
Why?
Because when an asset is inherited:
-
The recipient gets a step-up in basis — the new basis becomes the FMV at the date of death
-
This often eliminates unrealized gains or losses, allowing heirs to sell with minimal or no tax
In contrast, gifting a depreciated asset passes along the “baggage” of its tax history — including the complications of the dual basis rule.
Final Word
The Dual Basis Rule sounds technical, but its impact is very real — especially for heirs, beneficiaries, and anyone who receives valuable gifts.
As an estate planner, my job isn’t just to move assets — it’s to help families move forward without tripping over hidden tax traps.
So if you’re giving or receiving appreciated (or depreciated) property, pause and ask:
“Will this be a gain, a loss… or something in between?”
And then, be ready to talk basis — ideally before the sale happens.
