When you gift investment or business property to someone and that person sells that property they owe tax on the gain. The basis in the property for gain purposes is what the basis was in the hands of the donor (the person making the gift). So, if the donor had a basis of $100 and the donee (recipient of the gift) sold the property for $110, there would be a $10 gain.

What is the basis for someone who receives a gift and sells it for a loss. In that circumstance the basis is the LOWER of the basis in the hands of the donor or fair market value at the time of the gift. So let’s say that Fred holds a mortgage note on Blackacre from Mona for $100,000. The mortgage is under-water and there is no way that Mona will ever be able to repay the loan. Fred gifts the note to his son, Bam. Bam immediately forecloses and the property sells for $50,000. Does Bam get a capital loss of $50,000 or a capital loss of zero. That goes to what was the market value of the note on the date of the gift. It would appear that it would no more than $50,000. However, if Bam could have gotten an appraiser or another lender to state that the fair market value of the note was an amount larger than $50,000, then Bam could perhaps take the loss equal to the appraised amount. This is found in Reg. 1015-1 of the IRS regulations.