An Easy Guess
In U.S. taxation, the term basis refers to the cost used to calculate gain on a capital asset. When a capital asset is purchased, the initial basis includes the purchase price and any incidental expenses needed to prepare the asset for use. To determine the gain on sale, the basis is subtracted from the selling price. However, when the asset is received as a gift, determining the basis can be tricky, and this complexity extends to inherited property as well. Governments often aim to tax more on gains from gifted assets because the taxpayer did not pay for the asset.
With inherited property, however, there’s a difference. The taxpayer receives the asset as a family inheritance, not as a gift, which justifies a more favorable tax rate on the gain when sold. It’s also important to note that the basis of gifted property, inherited from the descendent, is typically much lower than its fair market value. This distinction between the donor's basis and the fair market value could make the reader an easy guess what taxpayers is expected to fix the appropriate basis for calculating gains on both gifted and inherited property. Guessed it right? Gifted Property - Donor's Basis; Inherited Property - Fair Market Value.
By CA L.Muralidharan and CPA L.Mukundan
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