What basis does a donee have for gifts received?

A donee generally receives a gift with a basis known as the donor's carryover basis. This means that the recipient of the gift takes on the same basis in the gifted property as the donor had. This rule is significant because it helps maintain consistency regarding the tax implications of the asset when it is later sold. The carryover basis concept prevents the donor from facing immediate tax consequences while also providing the donee an established basis rather than starting from scratch with a new acquisition cost.

For example, if the donor originally purchased an asset for $5,000 and the fair market value at the time of the gift is $7,000, the donee would inherit the donor's basis of $5,000. This is crucial during the eventual sale of the asset, as it affects the calculation of capital gains tax.

Understanding this principle is essential for effective estate planning and tax strategy, particularly in scenarios involving transferring appreciated assets.