When a property is donated, how is the donor's tax basis generally determined?

When a property is donated, how is the donor's tax basis generally determined?

• A. The cost of acquisition if acquired by purchase, or the fair market value at acquisition date, whichever is higher.
• B. The agreed upon value of the donor and the donee.
• C. The fair market value at the time of the donation.
• D. Any of the above.

Answer: (C)

The correct determination of the donor's tax basis when a property is donated is the fair market value at the time of the donation. This means that when an individual gives property to another person, the value of that property for tax purposes is recognized as its market value at the time the gift is made. This concept is important in the context of tax implications for both the donor and the recipient. The fair market value reflects what the property would sell for on the open market and represents a more accurate measure of the property's worth at the time of the transaction. Options that suggest the cost of acquisition or agreed-upon values do not align with IRS guidelines on the basis for gifts. The donor's tax basis is not influenced by the original purchase price if the property has appreciated or depreciated since that time; it strictly relates to the present market value at the time of the donation. Thus, understanding that the fair market value at the time of the donation sets the foundation for further tax implications—like the potential capital gains tax should the property be sold in the future—clarifies why this choice is the correct one.

The correct determination of the donor's tax basis when a property is donated is the fair market value at the time of the donation. This means that when an individual gives property to another person, the value of that property for tax purposes is recognized as its market value at the time the gift is made.

This concept is important in the context of tax implications for both the donor and the recipient. The fair market value reflects what the property would sell for on the open market and represents a more accurate measure of the property's worth at the time of the transaction.

Options that suggest the cost of acquisition or agreed-upon values do not align with IRS guidelines on the basis for gifts. The donor's tax basis is not influenced by the original purchase price if the property has appreciated or depreciated since that time; it strictly relates to the present market value at the time of the donation. Thus, understanding that the fair market value at the time of the donation sets the foundation for further tax implications—like the potential capital gains tax should the property be sold in the future—clarifies why this choice is the correct one.