The Gift's Basis
The basis of a gift is the total money that was spent on the gift by the original owner (your mother's basis). This is usually the original purchase price plus any money spent on purchase fees or improvements to the asset. The IRS does not tax the return of an investment in an asset. This would scare people away from investing.
When you sell your gift, you only owe income tax if you make more than the gift's basis. The sale proceeds up to your basis are completely tax free. As a result, a higher basis means less of a tax bite when you sell your gift property.
Higher Fair Market Value
The fair market value of your gift is what it would be worth if you sold it the day of the gift. If at the time of the gift the property's fair market value is higher than its basis, it's easy to figure out your gift's basis. In this case, your gift keeps the same basis as before (your mother's basis)
It does not matter how high the gift's fair market value is at the time of the gift; it keeps the old owner's original basis and does change from this transfer. If the original owner gives you a house worth $100,000 today, but he spent $50,000 on it originally, your basis in the gift house is $50,000.
Lower Fair Market Value
If you receive a gift that lost value and has a lower fair market value than its original basis, it gets a bit more complicated. You need to keep track of both the original owner's basis and the fair market value at the time of the gift.
If you sell the gifted property for more than the original basis, your gain is the sale proceeds over the original basis. If you sell the property for less than the fair market value at the time of the gift, your taxable loss, if deductible, is the difference between the sale price and the gifted fair market value. You can use any of its deductible tax loss against the gains on other sales. If you sell the property for a price between the gifted fair market value and original basis, you do not have a gain or loss.
Lower Fair Market Value Example
Let's say you were given a house that is worth $50,000 today but was originally purchased for $100,000. The fair market value of the gift is lower than its original basis.
If you sell the house for $110,000, more than the original basis, you make a taxable gain of $10,000, the sale price minus the original basis. If you sell the house for $40,000, you get a deductible taxable loss of $10,000, the difference between the fair market value at the time of the gift and the sale price. If you sell the house for $70,000, a price in between the basis and the fair market value at the date of the gift, there is no taxable event. You don't owe any tax and will not receive a tax deduction.
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the following applies if your sister inherited it. Mother's basis is irrelevant. Sister's basis would be the FMV on the date of the death of your mother. + any improvements made post-death. the FMV would be based on the date she gifted it to you. you go through the same computations as above to determine gain or loss. if there's a loss and you lived in the house, then the loss is not deductible. if there's a gain and you lived and owned it in it 2 out of 5 years before the sale you would be entitled to home sale exclusion
Gain = selling price less selling expenses is greater than her basis
FMV on date of sister's gift to you lower than her basis and net sales price lower then that FMV - a possible deductible loss but not if your personal residence
FMV on date of sister's gift to you lower than her basis and net sales price is between her basis and FMV then no gain or loss
