Valuation of real estate received as gift without good records

[aglambert]

I sold a California property in 2023 that my father gave me as a gift in 1986. My rough estimate is that the property was worth $150k-$200k at the time he gave it to me, based on a couple of roughly comparable properties sold around the same time, and I sold it for more than that amount. The assessed value was much lower than the market value in 1986, since my father had acquired it in 1972 and it was subject to CA Proposition 13 limitations on assessed valuation increases, which were much lower than the actual increases in market value for California real-estate in the 70's and 80's.

I believe he should have reported it for gift tax or against an inheritance exemption, but I don't have records of what he filed for taxes in 1986. My father died in 2019 with no property to go through probate and no estate tax return was filed.

Can I use comparable properties to establish a FMV in 1986 as the basis for my gain on the sale in 2023? Are there alternative ways I can fairly and legitimately establish a reasonable basis for the property value at the time of the gift?

[DianeW777]

No. The cost basis for a gift (not an inheritance) is the actual amount your father paid for the property plus, if any, gift tax paid at the time of the gift unless this produces a loss (see below).

Since you do not have information about a gift tax return, then you have his cost basis as if it were still in his hands.  See when you might use fair market value (FMV) below.

You should be able to get county or city records that would show what he paid for the property and then it would be safe for you to use any estimated cost of capital improvements he may have made at the time he paid for them if you know of any.  This will be your tax cost basis to calculate gain or loss.

• IRS FAQ Gift Property Basis
  • If the FMV of the property at the time the donor made the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.
    • Your adjusted basis for figuring a gain is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
    • Your adjusted basis for figuring a loss is the FMV of the property at the time the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
  • Note: If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.

If the FMV of the property at the time the donor made the gift is equal to or greater than the donor's adjusted basis, your adjusted basis is the donor's adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.

FMV is always allowed when property is inherited.