Don't include the IRS on your gift list
Suppose a relative gives you an
expensive painting. Several years later, your relative dies and you decide to
sell the painting. Your accountant says you'll owe capital gain tax on the
sale, and asks for your basis in order to reduce the amount on which you'll pay
tax. What's your answer?
When you sell property received
as a gift, the general rule is that your basis is the donor's cost basis. If
you sell at a loss, your basis is the lower of the donor's basis or the fair
market value on the date you received the gift. These numbers are adjusted in
some cases. But without cost records, you have no way of proving the donor's
basis and no way of saving yourself tax dollars.
If asking for records of the
cost when you receive a gift seems inappropriate, explain why you want to know to
help make the conversation less awkward. No one likes to pay unnecessary taxes.
Having the same conversation about the cost of valuable gifts you received in prior-years
is also worthwhile.
If you're the gift-giver, offer
the additional gift of presenting the cost records to the recipient at the same
time. Otherwise, you may end up giving an unintended gift to the IRS in the
form of unnecessary taxes.
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