Carryover basis rule is the specific tax principle that governs how basis is transferred in lifetime gifts, stating that the donee generally receives the donorTMs adjusted basis, increased by any gift tax paid attributable to net appreciation. Special rules apply when fair market value at the time of gift is below the donorTMs basis, creating different basis figures for loss versus gain calculations. These nuances can complicate future sale planning and record-keeping. The carryover basis rule contrasts with the step-up in basis rule for inherited assets, and understanding the distinction is essential for effective wealth-transfer and tax planning.

Advisors reference the carryover basis rule when working with tax professionals on large gift strategies, especially when clients transfer highly appreciated stock or business interests to younger generations or trusts. They emphasize the need to track original purchase prices, adjustments, and any gift tax paid so that future gains are computed correctly. In educational materials, advisors highlight that gifting can save estate tax at the cost of potentially higher income tax later. Understanding the carryover basis rule helps advisors frame these tradeoffs and encourage clients to involve CPAs when making sizable lifetime gifts.