What are the basis rules regarding joint tenancies that are created by a gift? Under Internal Revenue Code Section 1015(a), generally, the basis of property received via a gift would be the basis of the donor, or the last preceding owner that did not acquire the property via a gift. When the basis in property is determined by the donor’s basis, this is often referred to as a carryover basis because the basis in a sense “carries over” from the person making the gift. In other words, there is no increase or “step-up” in basis. In regards to determining a loss, the basis in property that is acquired via gift would be the lesser of the donor’s basis in the property, or the fair market value of the property at the time the gift is made. Based upon the above, the majority of the time, the basis of a joint tenant’s interest in property that is held in joint tenancy will be the adjusted cost basis of the donor. The adjusted basis of the donor may also be a portion or percentage depending upon the interests of the donor in relation to the other joint tenants. It is also important to note that the donor’s adjusted basis should be increased by the appropriate portion of any gift taxes paid, but not above the fair market value of the property under Internal Revenue Code Section 1015(d)(6).
If the transfer is made between spouses, or is a transfer incident to a divorce, basis would be determined under Internal Revenue Code Section 1041 as opposed to Section 1015. Under IRC Section 1041, the transfer would be treated as a gift whereby no gain or loss is recognized and the transferee or recipient of the gift would take the transferor’s adjusted basis, or a carryover basis.
An example may help illustrate the above issues. For this example, assume that Mr. Husband purchased real estate with a value of $700,000 of his own funds, and the property is held jointly with his wife as joint tenants. Further, we will assume wife is a US Citizen and that the interests of the spouses would be severable under state law. Thus, both husband and wife would be considered to own 50% (fifty percent) or half of the interest real property. The gift to wife of $250,000 would not be taxable because of the marital deduction under Internal Revenue Code Section 2523. Because husband’s adjusted cost basis would determine wife’s adjusted basis in the property received via the gift, wife’s adjusted basis in the real property should be $250,000.
It is important to note Regs 1.1041 because the carryover basis under IRC Section 1041 would apply even if the adjusted basis in the property that has been transferred exceeded the fair market value of property that the time of transfer. Therefore, transfers of property subject to IRC Section 1041 can produce a different result than when applying the tax law under IRC Section 1015.
If you have questions relating to gifts or your estate plan, please contact a Denver estate planning attorney at The McGuire Law Firm. An estate planning attorney can assist you with gifting issues and the drafting of estate planning documents such as a will or trust.