E.41.1 Basis Rules for Acquired Property

Certified Financial Planner CFP

Track your progress as you read

Finished sections get a check mark.

1 A. Professional Conduct and Regulation

A.1 Code of Ethics and Standards of Conduct A.1.1 The Six Ethical Principles A.2 Procedural Rules and Discipline A.2.1 Fitness Standards for Candidates A.3 Financial Institutions Overview A.3.1 Broker-Dealers vs. RIAs A.4 SEC and Securities Regulation A.4.1 FINRA and Broker-Dealer Regulation A.4.2 State Securities Regulation A.5 Consumer Protection Laws A.5.1 Privacy and Confidentiality Requirements A.6 Fiduciary Duty and Application

2 B. General Principles of Financial Planning

B.7 The Financial Planning Process B.7.1 Establishing the Client Relationship B.7.2 Gathering Client Data and Goals B.8 Personal Financial Statements B.8.1 Key Financial Ratios B.9 Cash Flow Management B.9.1 Emergency Fund Planning B.10 Debt Management Strategies B.10.1 Mortgage and Home Financing B.11 Economic Concepts B.11.1 Planning for Inflation B.12 Time Value of Money Concepts B.12.1 TVM Calculations and Applications B.12.2 Loan Amortization B.13 Education Needs Analysis B.14 Education Savings Vehicles B.14.1 529 Plans In-Depth B.15 Education Funding Strategies B.16 Gift/Income Tax Strategies

3 C. Risk Management and Insurance Planning

C.17 Principles of Risk and Insurance C.17.1 Risk Management Process C.18 Analysis of Risk Exposures C.19 Health Insurance Fundamentals C.19.1 Types of Health Insurance Plans C.20 Disability Income Insurance C.20.1 Disability Policy Features C.21 Long-Term Care Insurance C.22 Annuities Overview C.22.1 Fixed vs. Variable Annuities C.23 Life Insurance Fundamentals C.23.1 Types of Life Insurance C.24 Business Owner Insurance Solutions C.25 Insurance Needs Analysis C.26 Insurance Policy and Company Selection

4 D. Investment Planning

D.27 Equity Securities D.27.1 Fixed Income Securities D.27.2 Mutual Funds and ETFs D.27.3 Taxation of Investment Vehicles D.28 Systematic Risk D.28.1 Unsystematic Risk D.29 Economic and Market Cycles D.30 Measures of Risk and Return D.30.1 Investment Performance Measures D.31 Asset Allocation Strategies D.31.1 Portfolio Diversification D.32 Bond and Stock Valuation D.32.1 Stock Valuation Models D.33 Investment Policy Statement D.33.1 Modern Portfolio Theory D.34 Active vs. Passive Investing D.34.1 Common Investment Strategies D.35 Alternative Investments D.35.1 Options and Derivatives

5 E. Tax Planning

E.36 Income Tax Fundamentals E.36.1 Filing Status and Tax Brackets E.37 Types of Income E.37.1 Deductions and Credits E.37.2 Capital Gains and Losses E.38 Business Entity Taxation E.38.1 Self-Employment Tax E.39 Taxation of Trusts and Estates E.40 Tax Reduction Strategies E.40.1 Retirement Account Tax Strategies E.41 Property Transactions E.41.1 Basis Rules for Acquired Property E.42 AMT and NIIT E.42.1 Special Tax Situations E.43 Charitable Giving Strategies

6 F. Retirement Savings and Income Planning

F.44 Retirement Needs Analysis F.44.1 Sources of Retirement Income F.45 Social Security Benefits F.45.1 Social Security Claiming Strategies F.45.2 Medicare Planning F.46 Eldercare and Special Needs Planning F.47 Qualified Plan Overview F.47.1 Defined Benefit Pension Plans F.47.2 Defined Contribution Plans F.48 Eligibility and Vesting F.48.1 Coverage and Discrimination Testing F.48.2 Contribution and Benefit Limits F.48.3 401(k) Plan Features F.49 Non-Qualified Deferred Compensation F.49.1 Executive Compensation Plans F.50 Retirement Plan Selection for Businesses F.50.1 Individual Retirement Accounts F.51 Distribution Rules F.51.1 Required Minimum Distributions F.52 Retirement Income Strategies F.52.1 Tax-Efficient Withdrawal Strategies F.53 Business Succession Planning

7 G. Estate Planning

G.54 Property Titling and Beneficiary Designations G.54.1 Beneficiary Designations G.55 Strategies to Transfer Property G.55.1 Lifetime Gifting Strategies G.56 Wills and Estate Documents G.56.1 Powers of Attorney G.56.2 Advance Directives and Healthcare Documents G.57 Federal Gift Tax G.57.1 Federal Estate Tax G.57.2 Generation-Skipping Transfer Tax G.58 Sources for Estate Liquidity G.58.1 Life Insurance for Estate Liquidity G.59 Trust Fundamentals G.59.1 Revocable Living Trusts G.59.2 Irrevocable Trusts G.59.3 Trust Income Taxation G.60 Marital Deduction Planning G.60.1 QTIP Trusts G.60.2 Portability of Estate Tax Exemption G.61 Intra-family and Business Transfer Techniques G.61.1 Family Limited Partnerships G.61.2 GRATs and IDGTs G.62 Postmortem Estate Planning Techniques G.62.1 Disclaimer Planning G.62.2 Estate Tax Elections G.63 Planning for Divorce and Unmarried Couples G.63.1 Estate Planning for Unmarried Couples G.63.2 Planning for Blended Families G.64 Planning for Special Needs and Circumstances G.64.1 Special Needs Trusts G.64.2 ABLE Accounts

8 H. Psychology of Financial Planning

H.65 Client and Planner Attitudes, Values, Biases H.65.1 Money Scripts and Money Attitudes H.65.2 Planner Self-Awareness H.66 Behavioral Finance H.66.1 Cognitive Biases H.66.2 Emotional Biases H.66.3 Heuristics and Mental Accounting H.67 Sources of Money Conflict H.67.1 Couples and Money Conflict H.67.2 Family and Intergenerational Money Conflict H.68 Principles of Counseling H.68.1 Therapeutic Techniques in Financial Planning H.68.2 Professional Boundaries and Referrals H.69 General Principles of Effective Communication H.69.1 Listening and Questioning Skills H.69.2 Managing Difficult Conversations H.69.3 Non-Verbal Communication H.70 Crisis Events with Severe Consequences H.70.1 Death and Divorce H.70.2 Job Loss and Health Crisis H.70.3 Sudden Wealth and Sudden Loss H.70.4 Natural Disasters and Traumatic Events

E.41.1 Basis Rules for Acquired Property

Key Takeaways Explain This Topic AI

Inherited property receives stepped-up basis to FMV at date of death (or alternate valuation date 6 months later if elected); holding period is automatically long-term

Gifted property uses carryover basis (donor's basis) for gains; the double basis rule applies when FMV at gift date is less than donor's basis

Gift basis may be increased by gift tax paid attributable to appreciation: Basis Adjustment = Gift Tax Paid x (Net Appreciation / Taxable Gift)

Section 267 disallows losses on sales between related parties (siblings, spouses, lineal descendants, ancestors), but buyer may offset future gains

Section 1041 provides tax-free treatment for property transfers between spouses or incident to divorce with carryover basis

Community property states provide double step-up in basis (100% of property) at first spouse's death under IRC 1014(b)(6)

Last updated: October 2026

Basis Rules for Acquired Property

How you acquire property determines its tax basis. Understanding these rules is essential for advising clients on estate planning, gift strategies, and family transactions.

Inherited Property: Stepped-Up Basis

Under IRC Section 1014 , property acquired from a decedent receives a stepped-up basis equal to the property's fair market value (FMV) at the date of death.

Valuation Options

Valuation Method When to Use Basis Equals
Date of Death Default rule FMV on date of death
Alternate Valuation Date Executor election on Form 706 FMV 6 months after death

Alternate Valuation Date Requirements:

Must file estate tax return (Form 706)
Must reduce both estate value AND estate tax liability
Once elected, applies to ALL estate assets (cannot cherry-pick)
Key Features of Inherited Basis

Feature Rule
Holding Period Always long-term (regardless of how long decedent held it)
Depreciation Starts fresh for the heir; no recapture of decedent's depreciation
Loss Property Also receives stepped-up (or stepped-down) basis to FMV
Capital Gains Built-in gains during decedent's lifetime are eliminated

Example: Father purchased stock for $20,000. At his death, the stock is worth $100,000. His daughter inherits the stock with a stepped-up basis of $100,000. If she sells for $105,000, she recognizes only $5,000 of gain.

Assets That Do NOT Receive Step-Up
IRAs and 401(k)s - subject to income tax when distributed
Annuities - taxable portion remains subject to income tax
Income in Respect of a Decedent (IRD) - items that would have been taxable to decedent
Gifted Property: Carryover Basis Rules

Property received as a gift generally takes a carryover basis -the donor's adjusted basis carries over to the donee.

General Rule: Carryover Basis for Gains

When the FMV at gift date equals or exceeds the donor's basis:

Donee's Basis = Donor's Adjusted Basis

The donee's holding period includes the donor's holding period (tacked).

Exception #1: Double Basis Rule (Loss Property)

When FMV at gift date is LESS than donor's basis , a special "double basis" rule applies:

If Donee Sells For... Use This Basis
More than donor's basis Donor's basis (gain basis)
Less than FMV at gift FMV at date of gift (loss basis)
Between FMV and donor's basis No gain or loss recognized

Example: Andrea's basis is $10,000. She gifts property to Sam when FMV is $8,000.

Sam sells for $11,000: Gain = $11,000 - $10,000 = $1,000 gain (uses donor's basis)
Sam sells for $7,000: Loss = $7,000 - $8,000 = $1,000 loss (uses FMV at gift)
Sam sells for $9,000: No gain or loss (in the gap between bases)

Holding Period for Loss Property: When the donee uses FMV as basis (for a loss), the holding period starts at the date of the gift.

Exception #2: Gift Tax Paid Increases Basis

When the donor pays gift tax on appreciated property, the donee's basis may be increased:

Basis Increase = Gift Tax Paid x (Net Appreciation / Taxable Gift)

Where:

Net Appreciation = FMV at gift - Donor's Adjusted Basis
Taxable Gift = FMV - Annual Exclusion ($19,000 in 2025 and 2026)

Example: Joe gifts property worth $250,000 (basis $100,000) and pays $100,000 gift tax.

Net Appreciation = $250,000 - $100,000 = $150,000
Taxable Gift = $250,000 - $19,000 = $231,000 (using the $19,000 annual exclusion)
Basis Increase = $100,000 x ($150,000 / $231,000) = $64,935
James's Basis = $100,000 + $64,935 = $164,935

Important: The basis increase cannot exceed FMV at the time of the gift.

Section 267: Related Party Transactions

Section 267 disallows loss deductions on sales or exchanges between related parties.

Who Are Related Parties?

Related NOT Related
Siblings (including half-siblings) Step-siblings
Spouse In-laws
Lineal descendants (children, grandchildren) Aunts/Uncles
Ancestors (parents, grandparents) Cousins
Trusts where party is beneficiary Nieces/Nephews
How Section 267 Works
Seller's loss is permanently disallowed - cannot deduct the loss

Buyer gets dual basis (like loss property gifts):

Seller's basis for gains
FMV for losses
Buyer may use disallowed loss to offset future gains on that property

Example: Jack sells stock to his brother Pete. Jack's basis = $120,000; FMV = $40,000.

Jack's $80,000 loss is disallowed (related party)
Pete's basis: $120,000 for gains, $40,000 for losses
If Pete sells for $55,000: No gain or loss (in the gap)
If Pete sells for $130,000: Gain = $130,000 - $120,000 = $10,000 (the disallowed loss offsets)

CFP Exam Tip: Section 267 applies only to losses, not to gains. If Jack sold to Pete at a gain, the gain would be recognized normally.

Section 1041: Divorce Property Transfers

Section 1041 provides that transfers of property between spouses, or between former spouses incident to divorce, are treated as gifts for tax purposes.

Key Rules

Feature Rule
Gain/Loss Recognition None at time of transfer
Basis Carryover basis (transferor's basis carries over)
Holding Period Tacked (transferor's period carries over)
Treatment Treated as a gift, even if sold for value
"Incident to Divorce" Definition

A transfer is incident to divorce if:

Transfer occurs within 1 year of marriage ending, OR
Transfer is related to cessation of marriage AND occurs within 6 years of marriage ending under divorce decree
Planning Implications

The recipient spouse inherits the tax liability. When dividing assets in divorce:

A $100,000 stock with $20,000 basis has $80,000 built-in gain
That built-in gain transfers to the recipient spouse
This should be factored into property settlement negotiations

Example: Wife transfers rental property (FMV $300,000, basis $100,000) to Husband as part of divorce settlement.

No gain recognized by Wife at transfer
Husband's basis = $100,000 (carryover)
If Husband sells for $350,000, he recognizes $250,000 gain
Community Property Step-Up Rules

IRC Section 1014(b)(6) provides a significant advantage for community property states: both halves of community property receive a stepped-up basis when one spouse dies.

Community Property States (2025)
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin
Full (Double) Step-Up vs. Half Step-Up

Property Type At First Spouse's Death
Community Property 100% stepped-up to FMV (both halves)
Joint Tenancy (non-CP states) Only 50% stepped-up (decedent's half)
Tenants in Common (non-CP states) Only decedent's share stepped-up

Example: Married couple in California bought stock for $100,000 (community property). At first spouse's death, stock is worth $1,000,000.

Community Property: Surviving spouse's basis = $1,000,000 (full step-up)
If Joint Tenancy in non-CP state: Surviving spouse's basis = $550,000 (only half stepped up)
"Opt-In" Community Property Trusts

Several non-community property states (Florida, Tennessee, Kentucky, South Dakota, Alaska) now allow married couples to create community property trusts to potentially qualify for the double step-up.

Summary: Basis Rules at a Glance

Acquisition Method Basis Rule Holding Period
Purchase Cost basis Starts at purchase
Inheritance FMV at death (stepped-up) Always long-term
Gift (appreciated) Carryover (donor's basis) Tacked (includes donor's)
Gift (depreciated) Double basis rule Gain: tacked; Loss: starts at gift
Related Party Sale Dual basis (Section 267) Starts at purchase
Divorce Transfer Carryover (Section 1041) Tacked
Community Property Full step-up at first death Starts fresh for survivor