Cost basis for gift of subdivided property

Dear Tax Talk,
I am selling real estate received as a gift. The original property was a much larger estate that was subdivided before I received the gift. Since the gifted property didn’t exist before the subdivision, is my basis the date of the subdivision? How do you calculate the cost basis for a gift of subdivided property?
— Patrick

Dear Patrick,
No, your basis in the property is not the fair market value of the land on the date of the subdivision. When you receive property as a gift, the donor’s adjusted basis transfers over to you.

By the way, you should note that the gifted property did exist before the subdivision since it was part of the larger estate.

Generally, the adjusted basis is your original cost increased by certain items such as capital improvements and reduced by certain deductions such as previously deducted casualty losses.

For example, let’s say that Anna goes out and buys 10 acres of land for $100,000. The adjusted basis in the land is the purchase price of $100,000. After a few years, Anna decides to subdivide the land into 10 1-acre lots. Her basis in each lot is now $10,000 ($100,000 divided by 10 equal lots).

Next, Anna decides to give her good friend Patrick one of the lots, so her adjusted basis of $10,000 in that lot is now transferred to Patrick. If Patrick sells the lot for $25,000, this results in a $15,000 gain ($25,000 sales price minus the $10,000 adjusted basis).

The example above is very simplistic and, of course, does not take into consideration many real-life complexities that can arise when dealing with property sales or exchanges such as installment sales.

Thanks for the great question and all the best to you.

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