Tax Guide for Farmers – Basis of Assets, Part 5: Property as a Gift, Transfer from Spouse, or Inheritance

In the Internal Revenue Code concerning farmers, there is a section on the basis of assets. The purpose of this series of articles is to provide an overview of the rules concerning the basis of assets. The focus of this article is how to treat assets received as a gift, as a transfer from a spouse, or as an inheritance. The previous articles focused on Cost Basis, Allocating Basis, Adjusted Basis, and Basis Other than Cost.

Property Received as a Gift

When you receive property as a gift, the basis of the property is determined using the donor’s adjusted basis and the fair market value at the time the asset is given to you. If the fair market value is equal to or greater than the donor’s adjusted basis, your basis is the donor’s adjusted basis at the time the asset is given to you. In addition, you must increase your basis by any gift tax paid, as well as increase or decrease the basis by any required adjustments while you held the property.

If the fair market value is less than the donor’s adjusted basis, your basis depends on whether you have a gain or loss on the property when you dispose of the property. To determine if you have a gain, start with the donor’s adjusted basis plus or minus any required adjustments while you held the property. To determine if you have a loss, start with the fair market value when you received the gift plus or minus any required adjustments while you held the property.

If you hold the property as a business property, your basis is the donor’s adjusted basis plus or minus any required adjustments to basis while you held the property.

Property Transferred from a Spouse

The basis of property transferred to you by a spouse or former spouse in a trust or through other methods is the same as your spouse’s adjusted basis. However, if the property is transferred in a trust, you must adjust the basis for any gain recognized by your spouse or former spouse if the liabilities associated with the property are more than the adjusted basis of the transferred property.

The spouse or former spouse must provide you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer to you.

Property Received as an Inheritance

When you inherit property, your basis is typically one of the following:

  • The fair market value of the property at the date of the decedent’s death. The fair market value can be determined as the property’s appraised value in cases where the property is included in a federal estate return.
  • The fair market value of the property on the alternate valuation date.
  • The decedent’s adjust basis in the property to the extent any value is excluded from the decedent’s taxable estate because of a qualified conservation easement.

In certain circumstances, the executor of the person’s estate may choose to value the property at something other than the fair market value when the property has a special use. The executor may value the property based on its use in a farm or other closely held business.

If you receive property valued based on special use, you must increase your basis by any gain recognized by the estate or trust related to post-death appreciation.

Property Distributed from a Partnership or Corporation

The basis of property distributed from a partnership is the adjusted basis of the property to the partner immediately before the distribution. The basis of the property to the partner cannot be greater than the adjusted basis of the partner’s interest in the partnership reduced by any money received in the same transaction.

The basis of property distributed to a shareholder is the fair market value of the property.

How can you get answers to other questions about your taxes?

You can get additional help by contacting a tax attorney. Only a tax attorney will have the experience to answer your tax questions and negotiate matters with the IRS.

You can speak with a tax attorney by calling the telephone number at the top of this page or by completing the form below. Therefore, take the first step today to get the help you need with your taxes.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.