• Gifts of Depressed Value Assets Can Cause Loss of Income Tax Basis
  • April 1, 2009 | Author: Gregg M. Simon
  • Law Firm: Much Shelist Denenberg Ament & Rubenstein, P.C. - Chicago Office
  • In today's turbulent economic environment, gifting assets with depressed values can provide significant transfer tax benefits. However, care must be taken to avoid inadvertently causing the loss of income tax benefits.

    A beneficiary receiving an asset from a decedent upon his or her death generally receives an income tax basis for the bequeathed asset equal to its fair market value as of the decedent's date of death. Unlike testamentary transfers, a beneficiary receiving a lifetime gift from a donor generally receives an income tax basis for the gifted asset equal to the donor's basis. However, if at the time of the gift the value of the gifted asset is less than the donor's basis, a special rule applies: For purposes of determining loss on a subsequent sale of the gifted asset, the beneficiary’s basis is the lower fair market value of the asset as of the date of the gift.

    If you are contemplating a gift of an asset with a current fair market value that is less than the donor’s basis, and if the asset may be sold shortly after the gift is made, a better strategy may be for you (the donor) to sell the asset and realize the loss for income tax purposes. That approach would enable you to take full advantage of your basis, followed by a gift of the net proceeds to the donee.

    When contemplating a gift, care must be taken in determining what asset to give, so as not to cause loss of income tax benefits. Prior to making a gift, it is important to determine not only the value of the asset, but also what the basis would be.