What occurs to the basis of gifted property when the fair market value is lower than the donor's adjusted basis at the date of the gift?

When property is gifted, the basis of the gifted property is determined by a "carryover basis" rule, where the recipient (donee) typically takes on the donor's adjusted basis. However, if the fair market value (FMV) of the property at the time of the gift is lower than the donor's adjusted basis, a special rule applies.

In this case, the basis remains unchanged because the donor's basis is effectively transferred to the donee. The adjusted basis of the gifted property for the donee will be the same as the donor’s adjusted basis unless the property's FMV is lower than that basis and the property is later sold. If the donee sells the property for an amount less than the donor's adjusted basis, the donee's basis will then be adjusted to reflect the lower FMV at the time of the gift for loss purposes. However, this scenario doesn't create an adjustment at the time of gifting; it is relevant only at the point of sale.

Thus, no adjustment to the basis occurs simply due to the FMV being lower than the donor's basis at the time of the gift. Instead, the donee's basis is established based on what the donor had prior to the gift.