What is the Double Basis Rule concerning the fair market value (FMV) of gifted property?

The Double Basis Rule addresses how the fair market value (FMV) of gifted property is treated for tax purposes, particularly when it comes to realizing gains or losses upon the subsequent sale of that property. When a donor gifts property to a recipient, the recipient generally takes the donor's basis in that property. However, if the FMV of the property at the time of the gift is less than the donor's basis, this can create a unique situation for tax implications.

The correct answer implies that if the recipient sells the property, no gain or loss is recognized as long as the sales price is within a specific range defined by the donor's basis and the FMV at the time of the gift. The range encompasses situations where the property’s FMV is lower than the donor's basis, and any sale price that falls between these two figures would not trigger taxation on gains or losses, allowing the recipient to avoid recognizing income in this narrow band of values.

This rule acts as a safeguard for the recipient, protecting them from potential tax liabilities that might otherwise arise when the property is sold. The key takeaway is that the Double Basis Rule is designed to prevent recognition of gain or loss in situations where the gift's value has diminished compared to what the original owner