When someone gives you a gift, it’s a kind and thoughtful gesture. However, when it comes to financial gifts like property, stocks, or other investments, the IRS has specific rules about how these gifts are treated for tax purposes. For Texas residents, understanding these rules is especially important to avoid unexpected tax burdens and make the most of your financial planning. One key concept to grasp is the tax basis of a gifted asset and how it impacts taxes when the asset is sold as our The Woodlands, TX trust lawyer can explain who is licensed in Texas, Kentucky, Pennsylvania, and South Dakota.
What Is Tax Basis?
Tax basis is essentially the value used to determine how much profit or loss you have when you sell an asset. For example, if you buy a piece of property for $100,000, that $100,000 is your tax basis. If you later sell the property for $150,000, the $50,000 difference is your capital gain, which may be subject to taxes.
For Texans, who often invest in real estate, ranches, and oil and gas assets, understanding tax basis is crucial to ensuring that any profits from these investments are properly accounted for. This is just one example of how a Texas resident might lack the right estate plan.
The Difference Between Gifts And Inheritances
When you inherit an asset, its tax basis usually “steps up” to the market value at the time of the original owner’s death. For example, if your father in Texas bought a piece of land for $10,000 decades ago and it’s worth $100,000 when you inherit it, your tax basis would be $100,000. This step-up in basis often reduces the taxes you’ll owe when you sell the inherited asset.
Gifts, however, are treated differently. When someone gives you an asset as a gift, it does not receive a step-up in basis. Instead, the tax basis is carried over from the person making the gift. This is known as a “carryover basis.” For Texans with significant assets to pass on, this distinction can have a major impact on your financial legacy.
How Carryover Basis Works
Let’s say your aunt in Dallas bought shares of stock for $20,000 years ago, and now the stock is worth $50,000. If she gives you the stock as a gift, your tax basis becomes $20,000—the same as hers. If you decide to sell the stock for $50,000, you’ll owe taxes on the $30,000 gain, which is the difference between your $20,000 basis and the $50,000 sale price.
It’s important to note that this carryover basis applies regardless of the current market value of the gift at the time you receive it. This can result in significant tax implications if the asset has appreciated in value over time—a common scenario in Texas, where property values and investments often grow rapidly.
Why Gifts Don’t Receive A Step-Up In Basis
The IRS treats gifts differently from inheritances because the person giving the gift is still alive. Since the asset hasn’t gone through the estate process, the step-up in basis rules don’t apply. This ensures that any appreciation in the asset’s value during the giver’s lifetime is eventually taxed when the recipient sells the asset.
For Texans with large family ranches or valuable mineral rights, this rule means that gifting such assets during one’s lifetime could lead to higher taxes for the recipient compared to passing them down as part of an inheritance.
What Happens If The Gift’s Value Has Decreased?
If the value of the asset has gone down since it was purchased, the rules change slightly. For example, if your aunt in Houston bought a stock for $20,000 but it’s now worth $10,000 when she gives it to you, your tax basis depends on whether you sell the stock for a gain or a loss:
- If you sell the stock for more than $20,000, your basis is $20,000 (the giver’s original basis).
- If you sell the stock for less than $10,000, your basis is $10,000 (the fair market value at the time of the gift).
- If you sell the stock for an amount between $10,000 and $20,000, you won’t have a gain or a loss for tax purposes.
This rule prevents taxpayers from claiming a tax loss that didn’t actually occur during their ownership of the asset.
Keeping Records Of The Original Basis
One of the challenges with carryover basis is that it requires accurate records of the original purchase price. If you receive a gift, it’s essential to ask the giver for documentation of their original basis. Without this information, determining the correct basis and calculating any tax liability can become complicated—especially for Texans managing complex assets like oil and gas leases or large investment portfolios.
The Role Of Gift Tax Returns
Sometimes, the giver of a gift needs to file a gift tax return. However, this doesn’t mean they owe taxes—most people won’t owe any gift tax because of the annual gift tax exclusion and the lifetime gift and estate tax exemption. For 2025, the annual gift tax exclusion is $19,000 per recipient. Gifts above this amount may require a gift tax return, but the giver’s lifetime exemption (currently $13.99 million) usually covers the excess.
The important thing to remember is that gift tax rules and income tax basis rules are separate. The fact that a gift may or may not require a gift tax return doesn’t affect the carryover basis.
Planning Ahead To Minimize Taxes In Texas
Understanding how the tax basis of gifted assets works can help Texas residents plan ahead and potentially minimize taxes. Here are some strategies to consider:
- Communicate With The Giver: Ensure that the person giving you a gift provides documentation of their original basis.
- Weigh The Benefits Of Gifting Vs. Inheriting: In some cases, it may be more beneficial to inherit an asset rather than receive it as a gift, especially if it has significantly appreciated in value.
- Consider Timing: If the giver’s estate is well below the federal estate tax exemption, it might make more sense to pass the asset through inheritance for a step-up in basis.
For Texas residents, receiving a financial gift is a generous act, but it’s important to understand the tax implications. Gifts do not receive a step-up in basis, meaning they take on the original tax basis of the person making the gift. This carryover basis can have significant effects on the taxes you’ll owe when you sell the asset. If you and your family want to avoid probate, then you should contact an attorney to help with this. By understanding these rules and planning accordingly, Texans can avoid surprises and make informed financial decisions that align with their unique needs and goals. Stuart Green Law, PLLC has been working with families just like yours since he founded his firm in 2021, and he is ready to help you! Contact the firm today for help.