Following is the question raised by the professor.
If property is acquired by gift, the person acquiring the property has a basis in the property equal to the basis of the person who gave the property as a gift. If property is acquired by inheritance, the person receiving the property has a basis in the property equal to the fair market value of the property at the time the owner of that property died. Does that difference in determining basis make sense? Why is there that difference? Isn’t there a potential opportunity to avoid taxes
involved in that difference?
A student responded with the following. I am having problems with her logic. Can anyone help me understand what she is trying to say and whether her statements are a valid argument?
All of you have made very good points, but I am going to take a different approach on this topic and say it does not make sense (cents)!
A person who acquires property via a gift (assuming that a gift tax
return is required and that the FMV is greater than the basis) as the cost basis of the person who made the gift. On a gift tax return it is the FMV of the property that reduces the unified credit. So when the person making the gift dies the FMV of the gifts given are taken into account since the unified credit available for the estate tax
return have been utilized. So since the credit is reduced the timing difference does not make sense, and the person receiving the gift should acquire the gift for the same amount that was used on the gift tax tax as the FMV. The record keeping would be much easier, since that amount would be used to calculate the gains of loss on the sale of the property.
Another reason it should be changed is if the person gives property where the FMV is lower that the cost basis. Why would someone do this... I am not sure, but let's say they did. The calculation on the sale of the property is a nightmare. You have to know the cost, the FMV at time of transfer, and then remember that when the property is sold, that the loss it not a matter of the sales price less cost, but you have to take into account the FMV and reduce the loss. If the law
was changed you would only be concerned with the FMV at time of transfer.
One benefit of gifting is to gift property that you know or feel will greatly appreciate in value after the time of the gift, to save the unified credit down the road.