When property is appreciated as of the date of the gift, what happens to the donor's adjusted basis?

When a gift of property is made, the donor's adjusted basis generally remains unchanged at the original basis of the property, even if the property has appreciated in value at the time of the gift. The correct answer reflects the concept of "carryover basis," where the recipient of the gift takes the donor's original basis, which is beneficial for estate planning and tax purposes.

If the gift involves appreciated property and the donor has paid gift tax, this amount can potentially increase the basis for the recipient. Specifically, the recipient's basis may be adjusted upward to reflect the gift tax paid on the appreciated value. This can be significant when the recipient later disposes of the property, as it can affect the capital gains tax implications.

Understanding that the donor's basis remains unchanged unless specific circumstances apply, such as the impact of gift tax, clarifies why the original basis is important in terms of tax liability for both the donor and the recipient in estate planning scenarios.