The act of gifting is generally not a taxable event when you’re the receiver, or “donee.” Why? At the point of receiving the gift, you typically have not received income.
What about when you’re the gift-giver? How does the act of giving the gift affect your tax situation? If the gift is large enough, the giver, or “donor,” may have to file a gift tax return and may owe gift tax.
But in either case, you don’t need to report the gifts on your personal federal income tax return. This is true whether the gift is in cash or property. However, when you sell property you received as a gift, the rules change. At that point, the gain from the sale becomes taxable.
Here’s how the rules work. Your basis in the gifted property is the same as it was in the hands of the donor. In addition, you are considered to have owned the property for as long as the donor owned it. (Be aware that property received from an estate is treated differently.)
Example: Say you received real estate from your mother last month. The property has a current value of $100,000 and your mom bought it for $30,000 twenty years ago. If you sell the property this year for $100,000, you have a long-term capital gain of $70,000 ($100,000 minus your mother’s cost of $30,000). You get favorable long-term capital gain treatment because you are deemed to have owned the property for twenty years.
One more situation where a gift could affect your income tax return is when you receive income produced by the gift. For example, dividends received on gifted stock is reportable on your federal income tax return in the year you receive it.
If you have questions about the tax consequences of giving or receiving gifts, contact our office. We’ll be happy to assist you.