Suppose a relative gives you an expensive painting. Several years later, your relative
dies and you decide to sell the painting. Your accountant says you'll owe capital gain
tax on the sale, and asks for your basis in order to reduce the amount on which
you'll pay tax. What's your answer?
When you sell property received as a gift, the general rule is that your basis is the
donor's cost basis. If you sell at a loss, your basis is the lower of the donor's basis or
the fair market value on the date you received the gift. These numbers are adjusted
in some cases. But without cost records, you have no way of proving the donor's
basis and no way of saving yourself tax dollars.
If asking for records of the cost when you receive a gift seems inappropriate, explain
why you want to know to help make the conversation less awkward. No one likes to
pay unnecessary taxes. Having the same conversation about the cost of valuable
gifts you received in prior-years is also worthwhile.
If you're the gift-giver, offer the additional gift of presenting the cost records to the
recipient at the same time. Otherwise, you may end up giving an unintended gift to
the IRS in the form of unnecessary taxes.