Carryover basis
When property is given away during life, the recipient generally takes over the giver's own basis in it, rather than a fresh valuation.
What it means
Basis is what a gain or loss is measured against when something is sold. Property received as a gift generally carries the giver's adjusted basis with it, so the gain that built up in the giver's hands becomes the recipient's to account for on a sale.
Where the property is worth less than the giver's basis at the time of the gift, there are two bases rather than one: the giver's basis for working out a gain, and the value at the time of the gift for working out a loss.
This is the opposite of what happens at death, where property acquired from someone who has died is generally valued at the date of death instead.
Why it matters
It is the arithmetic that decides whether a family is better off transferring a long-held house now or leaving it to be inherited, and it is almost never mentioned at the point the decision is made.
It applies to the property, not to cash. Giving money and giving the house are different gifts with different consequences.
When you are likely to meet it
- When a parent considers deeding a house to a child during life.
- When a gifted property is sold and the gain turns out larger than expected.
- When comparing a lifetime transfer with an inheritance.