United States
Hong KongBasis: the number that decides the gain
Purchased property takes cost basis. Gifted property generally takes the donor's carryover basis, with a dual basis rule where value has fallen. Inherited property takes a stepped-up basis equal to fair market value at death.
Three ways to acquire property and three different answers, and questions are built on choosing between them.
Purchased
Cost, plus acquisition costs, plus capital improvements, less depreciation taken.
For securities, purchase price plus commissions. Reinvested dividends increase basis, which is the point clients most often miss and which causes them to overstate their gain.
Gifted
Generally the donor's basis carries over. The recipient steps into the donor's position, including the holding period.
The complication arises when the property has fallen in value below the donor's basis at the date of the gift. Then a dual basis applies:
| On a later sale | Basis used |
|---|---|
| Sold above the donor's basis | The donor's basis - there is a gain |
| Sold below the fair market value at the gift date | That fair market value - there is a loss |
| Sold between the two | No gain and no loss |
That third row is the examinable one and it surprises people. The planning consequence is straightforward: do not gift loss property. Sell it, take the loss yourself, and gift the cash.
Inherited
Fair market value at the date of death - the step-up in basis. Or the alternate valuation date six months later, if elected and if it reduces both the estate value and the tax.
Inherited property is treated as long term regardless of how long the decedent or the heir held it.
A client with a large low-basis holding they no longer want faces a choice: sell and pay the gain, or hold and let heirs receive it with a stepped-up basis. That trade-off appears constantly in case studies and connects the investment, tax and estate domains at once.
Community property
Nine states treat most assets acquired during a marriage as owned jointly, and both halves receive a step-up on the first death rather than only the decedent's half.
That is a significant difference and a favorite question, because it means a surviving spouse in a community property state may have a much higher basis than one elsewhere.
Adjustments over time
- Capital improvements increase basis; repairs do not.
- Depreciation reduces basis, and is recaptured on sale.
- Return of capital distributions reduce basis.
- Reinvested dividends increase basis.
- A disallowed wash sale loss increases the basis of the replacement.
Keeping records is the practical point. A client who cannot substantiate basis may be treated as having none, which makes the entire proceeds a gain.
Dollar limits and rate thresholds here are indexed annually and several were changed by the 2025 reconciliation act. Confirm the current figure against the IRS before relying on it, and expect the exam to test the rule rather than the number.
Common questions
What is basis in gifted property?
Generally the donor's carryover basis, along with the holding period. A dual basis rule applies where the property had fallen below the donor's basis at the gift date.
What is the dual basis rule?
Where gifted property has fallen in value, the donor's basis is used to compute a gain, the value at the gift date to compute a loss, and a sale between the two produces neither.
What is a step-up in basis?
Inherited property takes a basis equal to fair market value at the date of death, or the alternate valuation date six months later if elected. It is always treated as long term.
Should you gift property that has fallen in value?
No. The loss is effectively wasted under the dual basis rule. Sell it, take the loss yourself, and gift the cash instead.
What is different in community property states?
Both halves of community property receive a step-up on the first death, not only the decedent's half - so a surviving spouse may have a much higher basis than in a common law state.