Inheriting a Prior Gift
Can an individual who inherited property in turn gift the property to someone, and then when that person passes inherit it back and receive a new stepped-up basis? Yes, but per Sec 1014(e), the recipient of the gift will have to hold the property for a period of one year before he or she dies for the gift-giver to get a basis adjustment. Note that the basis is a two-way street. Could be step down as well as step up. A gift tax return, Form 709, will need to be filed if the value of the property given exceeds the current gift tax exclusion allowance ($16,000 in 2022).
Sec 1041(e)Appreciated Property Acquired by Decedent by Gift Within 1 Year of Death
In general, In the case of a decedent dying after December 31, 1981, if:
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appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death, and
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such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor), the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.
Example: Dad purchased stock for $5,000. Son inherited the stock when Dad died, at which time the FMV of the stock was $6,000. Son gifts the stock to Mom when the value of the gift is $6,500, and that’s his only gift to her in that year. No gift tax return was required because the value was below the gift tax exclusion amount. Mom dies two years later when the FMV of the stock is $8,000 and wills the stock to Son. Since Mom held the stock for more than one year, Son’s basis in the inherited stock can be stepped up to $8,000. If the stock had been worth $4,000 when Mom died, Son’s inherited basis would be $4,000.
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