but OK because the property

but OK because the property appreciated so fast while Ann Marie owned it that she wouldn't miss the $30,000.

Ann Marie takes her financial papers to the local tax service to get her income tax return prepared.

She is told her capital gains tax is $197,000 instead of the $30,000 she had planned for. How can this be?

Basis matters

The much larger capital gains tax is the unintended consequence of a family tradition of giving real estate during the donor’s lifetime.

Because a recipient of an inter vivos gift receives it with the basis of the donor, the basis of this family real estate never increased above the $15,000 original acquisi tion cost. Ann Marie’s profit was $985,000.

How do you avoid such an outcome?

Always check the basis of any gift you intend to make. Hold low-basis, appreciated assets, and give high-basis, and non-appreciated property — as a general rule — when dealing with family members or other individu als.

Gifts to charitable institutions should be low-basis, high-value assets, since you get a full market-value deduction for such gifts against personal income (with some restrictions), and no capital gains tax is payable.

‘Step up in basis’

Using our illustration, had Ann Marie received the real estate as a testamentary bequest in her father’s will, her basis would have been its fair-market-value at her father’s death.

That is due to a “step up in basis” that occurs at death. It applies to real and personal property.

Had she then sold the real estate after her father’s death at its date-of-death value — let’s say. $1,000,000 — her profit would have been zero, and no capital gains tax would have been due.

Nick Borst, ofWarrenton, is an attorney with a practice specializing in estate plan ning and administration. He can be reached at <540) 34770S8.