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Can I deduct losses on my income tax return?

Losses are deductible up to the amount of “adjusted basis”. However, individuals cannot deduct losses unless they are either: (1) incurred in a trade or business, (2) incurred in a transaction entered into for profit, (3) arising from fire, storm, shipwreck or other casualty, or (4) from theft. Deductible losses do not include losses from the sale of capital assets, like stocks and other investment securities. Those are capital losses to which special rules apply

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What is the tax basis on the sale of gifted property?

If the fair market value of the property at the time of the gift to you is less than its adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Your basis for figuring gain is the same as the donor’s adjusted basis. Your basis for figuring loss is its fair market value when you received the gift. If the fair market value of the property is equal to or greater than your its adjusted basis, your basis is the donor’s adjusted basis at the time you received the gift.

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How is the basis of property determined for income tax purposes?

The basis is any property is the cost of the property plus any additions or improvements paid for over the life of the property. There are exceptions to this general rule. Property that is inherited receives a stepped up basis or a stepped down basis to the fair market value of the property as of the date of the decendent’s death. Property that is gifted to someone carries the same basis as that of the donor of the gift, unless the fair market value is lower than the donor’s basis, and in that instance the basis is stepped down to the fair market value.

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