Covering the Bases of Tax Basis

Written by Sagar Jariwala, JD, LLM, and Phoebe Stone, JD, MA (Bioethics)

Gift tax, estate tax, generation-skipping transfer tax, inheritance tax, capital gains tax, income tax, and property tax: estate planners must consider all these types of taxes when creating a plan for a client’s assets.

The federal estate and gift tax and the generation-skipping transfer tax exemptions are both $13.99 million for 2025. As of 2026, these exemptions will be statutorily set at $15 million, adjusted annually for inflation, due to recent Congressional action. Because these amounts may be adjusted again in the future, it is important for practitioners to be mindful, however, in the immediate future, the vast majority of clients will not have taxable estates.

A recent study found that taxpayers must have approximately $5.813 million in net worth to place in the top one percent in the United States. As of June 23, 2025, the United States population was approximately 342 million people. Thus it is clear that under current circumstances, 99 percent of the US population (338 million people) will likely not have wealth transfer tax concerns (unless there is drastic legislative change in the future). Arguably, since the enactment of the American Taxpayer Relief Act of 2012, the focus long ago shifted from wealth transfer tax planning to income tax planning for clients outside the top one percent of wealth. Understanding basis is a key component of income tax planning, and this article discusses foundational basis concepts that every estate planner must understand. Basis can be an important consideration for determining the optimal time for clients to gift, sell, or otherwise transfer their assets. It can also help determine which specific assets a client should gift during their lifetime and which they should hold until death. Mistiming asset transfers can lead to unnecessary income tax liabilities for clients and beneficiaries.

Property Purchased and Sold by an Individual 

Generally, the basis of a property is the cost of acquiring it. However, the property’s fair market value can increase or decrease independent of the basis, and the basis can increase or decrease independent of the fair market value. This means that the fair market value of an item and the owner’s basis in the item do not necessarily match. For example, imagine that P purchased a house in 1980 for $100,000, which is now worth $1.5 million due to rising property values; P’s basis is $100,000, but the house's fair market value is $1.5 million. When clients sell appreciated assets, they recognize gain on that sale and are likely to be subject to capital gains taxes. It is also possible to have a loss if the asset has depreciated. If clients sell depreciated assets and have a capital loss, the loss can impact their overall income tax liability by, for example, offsetting any capital gains or ordinary income.  

However, certain events can cause the basis of property to increase or decrease, which in turn impacts whether there would be any capital gain or loss when the asset is sold. This adjusted amount is known as the adjusted basis. The Internal Revenue Code (I.R.C.) provides that gain from the sale or other disposition of property is the excess of the amount realized over the adjusted basis. The loss from the sale or other disposition of property is the excess of the adjusted basis over the amount realized. The amount realized from the sale or other disposition of property is the sum of any money received plus the fair market value of the property (other than money) received.

Example 1. P purchases land and an office building for $500,000. The value of the real property increases over time, and P ultimately sells the land and office building for $800,000.

As noted above, under certain circumstances, it is possible to achieve upward or downward adjustments to the basis while retaining ownership of an asset. For example, funds spent to make capital improvements can cause an upward adjustment of basis; if the property loses value over the course of its useful life, the depreciation can cause a downward adjustment to basis. 

Example 2. Consider the possibility that, prior to selling the property, P spent $250,000 to remodel the office building, and there was depreciation of $25,000:

An Introduction to Basis of Gifted and Inherited Assets

Consider a situation in which P gifts R the appreciated property instead of selling it. This gift could be undesirable because R takes P’s adjusted basis in the property (sometimes called carryover basis). As is the case with income, long-term capital gains are taxed at graduated rates. If R sells the appreciated property, R could pay 15 or 20 percent or more in taxes on the gain. However, if P dies owning the appreciated asset and then leaves it to R as a bequest, R will receive the asset at a basis adjusted to fair market value as of the date of P’s death. Therefore, R’s basis would be equal to the fair market value, and R could sell the inherited appreciated asset at fair market value without recognizing any capital gain—so long as the sale occurs shortly after P’s death. If the asset increases in value between the date of P’s death and the sale, the postdeath appreciation of the asset while in R’s hands could result in taxable capital gain. 

This analysis can be significant if clients want to transfer ownership of highly appreciated assets. On one hand, it might be wise to consider making such gifts while transfer tax thresholds are high, allowing assets to be transferred without imposition of transfer taxes in the form of gift taxes, though the recipient would take the asset at the donor’s basis. On the other hand, it might be wise for clients to hold on to their appreciated assets and leave them to their beneficiaries as an inheritance to ensure that the beneficiaries receive the assets at a basis adjusted to fair market value. The latter strategy carries a risk that the assets may be subject to transfer taxation in the form of estate taxes, depending on the size of the client’s estate and the transfer tax thresholds at the time of the client’s death. The foregoing discussion begins to examine the basis of gifted assets, but there is more to understand about the basis of gifted and inherited property.  

Basis of Property Acquired by Gift

For determining gain on property acquired by gift, the donee’s basis in the property is the donor’s . . .

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