Carryover basis
From Wikipedia, the free encyclopedia
Carryover basis occurs when a property transfer also results in a transfer of the transferor's basis in the property. The transferor's basis in the property "carries over" to the transferee.
Carryover basis, also referred to as a transferred basis, applies to inter vivos gifts and transfers in trust.[1] Generally, a taxpayer's basis in property is the cost to acquire the property.[2] However, there is an exception for inter vivos gifts and transfers in trust.[1] For gifts, to calculate a gain, the donee has the same basis in the property as the donor's adjusted basis in the property.[3] The same rule applies for calculating a loss, unless the donor's adjusted basis is greater than the fair market value of the property at the time of the gift.[4] In this case, the loss does not carry over and the basis is the fair market value of the property at the time of the gift.[5]
Example
In 1998, Mother purchased a lamp for $20. In 2000, Mother gifted the lamp to Daughter. At the time of the gift, the lamp's fair market value was $10. In 2002, Daughter sells the lamp to John.
(a) Daughter sells the lamp for $38. For the purpose of determining gain, Daughter uses Mother's carryover basis ($20). Thus, Daughter realizes an $18 gain in the sale to John.
(b) Daughter sells the lamp for $8. For the purpose of determining loss, Daughter uses the fair market value of the property at the time of the gift ($10). Thus, she realizes a $2 loss in the sale to John.
(c) Daughter sells the lamp for $15. For the purpose of determining gain, she uses Mother's basis of $20. Thus, there is no gain. But there is no loss either; for the purpose of determining loss, Daughter uses the fair market value of the property at the time of the gift ($10). Thus, Daughter realizes neither a gain nor a loss in the sale to John.