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What Is a Carryover Basis?

By Theresa Miles
Updated Feb 11, 2024
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Carryover basis is the value of an asset for tax purposes that is transferred with the asset to a new owner. Every jurisdiction with a tax code sets its own rules regarding the valuation of assets. In the US, for example, carryover basis applies to gifts of assets that are given during the life of the gift-giver. The tax code establishes how the recipient of the gift should treat the increase or decrease in the value of the asset from the time the gift-giver acquired it for the purpose of paying capital gains tax or taking a loss.

Many countries tax the income made by individuals and entities. Part of the complex process of establishing a tax code is to determine what should be considered taxable income. With tangible assets that are held for long periods of time, income taxes are typically paid on the increase in value of the asset from the time the asset was purchased to the time it is sold. This type of tax is called a capital gains tax because it treats the gain in the value of an asset as income.

When computing the capital gain on an asset, the owner has to start with the asset's basis, typically the original cost of acquiring the asset. This amount is compared to the eventual sales price of the item. If the sales price is more than the basis, the owner pays capital gains tax on the increase in value. Decreases in value allow the owner to take a loss on his taxes.

Establishing an asset's basis and the amount of capital gains tax that must be paid is easy when the item is bought and sold on an open market. Tax authorities consider the purchase and sales prices to be definitive signposts of the change in value. When the asset is given as a gift instead of sold, however, the issue of how to assess taxes on the transfer becomes an issue. It is in this instance that the carryover basis rules of a jurisdiction's tax code apply.

Some jurisdictions provide favorable tax treatment for gift-giving. Carryover basis rules allow the parties to forgo paying taxes on the transfer at the time the gift is made and lets the gift recipient step into the shoes of the giver. The recipient is allowed to adopt the basis that was established when the gift-giver originally purchased the item, instead of trying to estimate what the gift would have sold for on the open market.

Another instance when carryover basis rules tend to apply is in exchanging like-kind property. For example, sometimes a tax authority will allow homeowners to transfer the basis from their original house to a newly purchased single-family home, even if the two properties have different market values. This allows a family to “trade-up” into a better home within a certain price range without incurring a large capital gains tax bill at the time of the move.

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