Which of the following best describes how the gain basis is handled if property has depreciated?

The best description of how the gain basis is handled if property has depreciated is that it is determined by the fair market value at the gift date. When property is gifted, the recipient typically takes a carryover basis, which means they inherit the original basis from the donor, as long as the fair market value of the property at the time of the gift is higher than the donor's basis. However, if the property's fair market value has depreciated below the donor's basis, the recipient's basis for gain purposes is adjusted to the fair market value at the time of the gift.

This adjustment ensures that if the recipient later sells the property, they will recognize a gain only if they sell it for more than this lower adjusted basis, which aligns with the principle of taxing the gain rather than the loss. Therefore, addressing the gain basis in terms of fair market value at the gift date accurately captures the tax implications of depreciated property.