In a nutshell
The split, dual or bifurcated basis rule refers to a principle in tax law that applies in certain situations where an asset’s basis (or value for tax purposes) is determined differently for different types of taxes. For example, in the context of gift and estate taxes in the United States, an asset may have one basis for determining gain or loss (usually the donor’s original basis), and a different basis for determining estate or gift tax (usually the asset’s fair market value at the time of the gift or death). This rule is most often relevant in situations involving the gifting of property or the inheritance of property.
Further examination of the Bifurcated Basis Rule
Bifurcated means that there a two forks in the taxation of property you received gratuitously from someone else, the path depending on whether you were gifted property or inherited it.
Cost or tax basis is essentially the original cost of assets when they were acquired adjusted for factors such as depreciation. Adjustments to the basis can be a complex topic, refer to IRS Publication 551 (12/2018).
Interestingly, since 1921 the recipients of gifts and bequests are treated differently. This fact pattern is know as the split, dual or bifurcated basis rule:
If the property is acquired by gift the original basis is carried over, in other words, the gift recipient (donee) steps into the shoes of her benefactor (donor) as far as basis is concerned. In contrast, if property is acquired from a decedent, a new basis is determined based on the market value of the property at the time of the decedent’s death. This is commonly leads to a basis step up (assuming appreciation).
Gift recipient – realized losses vs. gains
As we have seen, the gift recipient (donee) has the same tax basis as the donor. If the donee later sells the property, she will get taxed on any gains that occurred during the donor’s holding period and her own holding period. The situation is different with losses. Here she can only claim losses that occurred during her own holding period not the ‘built-in losses’ that occurred before donation. This differential treatment was added in 1934 to prevent shifting of built-in losses to recipients who would realize higher tax savings (i.e., a donation of tax losses from low tax bracket to high tax bracket individuals).
While the donee does not have to pay income taxes when the gift is received (but gets taxed on any income the gift produces during the holding period and on any capital gains upon the sale of the asset, see above), a gift tax may be imposed on the donor. This is, in a manner of speaking, double taxation of donor and donee: The donee will eventually be taxed on the built in gain which was also the reason for the gift tax on the donor. Therefore, the donee’s basis in property acquired by gift may be increased to reflect the donor’s gift tax liability incurred by this transfer IRC Section 1015(d).
Property acquired from a decedent
As mentioned above, the basis of a person who receives property from a decedent (by inheritance, not as a gift) is adjusted to the fair market value at the date of the decedent’s death. In consequence, no income tax is created for the decedent or the recipient. This tax-free basis step up is only rarely offset by estate taxes because of the generous basic exclusion (unified tax credit for gift and estate taxes). In 2021 the unified credit was $11,700,000, which is set to revert back to half that amount in 2025.
What is meant by the uniform basis rule?
