Depreciation of Assets Acquired as a Gift

Special rules apply to property acquired as a gift. The determination of the basis for depreciation purposes and the amount of deductible loss on the eventual sale of the asset are treated differently for property received as a gift.

The first step in determining the depreciation deduction allowable for property received as a gift is to determine the donor’s adjusted basis, the FMV of the property at the time of the gift, and any gift tax paid by the donor on the gift.

Depreciation is just one of the many tax update topics covered in a complimentary live webcast on December 17 at 8:00am PT.

The donor’s adjusted basis plus a portion of the gift tax paid by the donor is used by the taxpayer to establish their depreciable basis in the gift. However, unlike a related party transaction, the taxpayer does not “step into the shoes” of the donor. Instead, the taxpayer starts the depreciation recovery period as of the date of the gift, using the applicable convention and method.

Example: Grandpa decided it was time to abandon his summer home and move permanently to Florida. On April 30, 2015, he gave his house to his niece, Peggy. The FMV of the property at that time was $250,000. Grandpa’s basis in the home was $200,000. He filed Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, but did not owe any gift tax.

Peggy decides to use the house as rental property. On her 2015 return, she reports the acquisition date as April 30, 2015, and a beginning basis of $200,000. Residential real estate is depreciated over 27.5 years using the mid-month convention and the straight-line method.

For gifts received after 1976, a portion of the gift tax that was paid on the gift is added to the basis. This is calculated by multiplying the gift tax by a fraction. The numerator of the fraction is the net increase in value of the gift, and the denominator is the amount of the gift. The net increase in value of the gift is the FMV of the gift less the donor’s adjusted basis. The amount of the gift is its value for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies.

Example: Use the same facts, except Grandpa paid $2,000 for the gift tax due with Form 709. The net increase in the value of the gift was $50,000 (the FMV of $250,000 less Grandpa’s basis of $200,000). The amount of the taxable gift for gift tax purposes was $236,000 ($250,000 FMV âˆ’ $14,000 annual exclusion for 2015). The amount of the gift tax that is added to Peggy’s basis is $424 ($2,000 gift tax Ã— ($50,000 net increase in value Ã· $236,000 taxable gift amount)).

If the FMV of the property at the date of the gift is less than the donor’s adjusted basis, the depreciable value is still equal to the donor’s adjusted basis plus the applicable portion of gift tax paid. However, if the taxpayer who received the gift sells the property at a loss, the basis for calculating the loss is the FMV of the property at the time the taxpayer received the gift plus or minus any required adjustments to basis while the taxpayer held the property.

If the result is a loss when the adjusted basis is used to calculate a gain and the result is a gain when the FMV is used to calculate a loss, the taxpayer has neither a gain nor a loss on the sale of the property.

Depreciation is just one of the many tax update topics covered in a complimentary live webcast on December 17 at 8:00am PT.Â No worries if you can't attend. Register anyway--and you will have access to the recording through April 15!