What rule applies when property has depreciated at the time of a gift?

The rule that applies when property has depreciated at the time of a gift indicates that the donee's basis in the property becomes the lower of the donor's adjusted basis or the fair market value (FMV) at the time of the gift. This is relevant for tax purposes as it determines the basis that the recipient will use should they later sell the property.

This loss basis approach is significant because it prevents the donee from claiming a loss if they decide to sell the property for less than what the donor originally paid. In situations where the property depreciates in value, the tax code ensures that the donee's basis reflects the economic reality of the property's worth, hence the loss basis being the minimum of the two values – the donor's adjusted basis or the FMV at the time of the gift.

Understanding this principle is crucial for both donors and donees in estate planning, as it affects potential capital gains taxes when the property is eventually sold. The proper calculation of the basis will influence tax liabilities and impact how gains or losses are reported on tax returns.