Which statement is true regarding the basis of gifted property?

The statement that the basis is adjusted by any gift tax paid is true and highlights how the tax implications work regarding gifted property. When one person gifts property to another, the recipient typically receives the property with a basis equal to the donor's basis in the property, which is often referred to as "carryover basis." However, if the donor has paid gift tax on the transfer, the recipient can increase their basis by the amount of the gift tax paid, but only up to the extent that it increases the basis above the donor's original basis.

This means that the gift tax can effectively adjust the recipient's tax basis in the asset, allowing for potential tax advantages or mitigating capital gains taxes if the recipient later sells the asset. The concept is especially important in determining the potential tax liability when the gifted asset is sold, which can impact effective estate planning and tax strategies.

The other options are incorrect regarding how gifted property basis works: the basis isn't strictly the fair market value at the time of the gift, nor is it determined by the recipient's original cost, since the recipient does not have an "original cost" in the context of received gifts. Lastly, basis is indeed relevant for taxation purposes, especially when considering capital gains taxes upon the sale of the