Giving During Life or Leaving at Death: Why Tax Basis Matters

Two families can pass on the same house or the same stock and leave their heirs with very different tax results. A big reason is a tax term called basis. It is worth understanding before you decide to give something away.

Key takeaways

• Basis is generally what you paid for an asset, with some adjustments
• Gain is the difference between basis and what it sells for
• Assets given during life and assets inherited are treated differently
• Everyone's situation is different, so the details matter

What basis means

Basis is, in simple terms, the starting number for figuring a gain. If you bought stock for one amount and it later sells for more, the difference is a capital gain, and tax may be due on it. The higher the basis, the smaller the gain.

Giving an asset during your life

When you give someone an asset as a gift, they generally take over your basis. This is sometimes called carryover basis. If the asset has grown a lot in value, the person who receives it may owe tax on all of that growth when they sell.

Gifts may also have gift tax reporting rules. Many gifts need no tax, but some require a form. Ask a professional about your own case.

Leaving an asset at death

When someone inherits an asset, its basis is generally reset to its value on the date of death. This is often called a step-up in basis, though in some cases it can go down instead. Because of the reset, growth that happened during your life may not be taxed as a capital gain when your heir sells.

This does not apply to everything. Retirement accounts such as traditional IRAs do not get this treatment. Their withdrawals are generally taxed as ordinary income to the person who receives them.

Putting it together

Neither approach is always better. Some things to weigh:

1. Is the asset worth much more than you paid for it?
2. Do you need it for your own security in the years ahead?
3. Does your family member need help now, or later?
4. Does state tax or estate tax play a role?
5. Is giving a way of reaching your goals, such as helping a child buy a home?

Keep good records of what you paid for each asset, and of any improvements. Heirs often have trouble finding this later.

Sources and references

• IRS: Publication 551, Basis of assets (opens in a new tab)
• IRS: Topic no. 703, Basis of assets (opens in a new tab)
• IRS: Gift tax (opens in a new tab)

This article is general information, not legal, tax or investment advice for your situation. Tax and estate rules change and depend on your facts. Talk with a qualified attorney and tax professional before making decisions.